Bring Another Party to the Negotiations


Let’s go back to our simple negotiating game between the buyer and seller. Assume that now, however, there exists a second buyer who also values the good at $1300. Further assume that the two buyers won’t collude but rather will compete to buy the good from the seller.

Value of the Good to Buyer 1 = $1300

Value of the Good to Buyer 2 = $1300

Value of the Good to the Seller = $1000

When we add a second seller, we can determine the exact sale price. Would it be reasonable for buyer 1 to acquire the good for $1200? No, because this outcome is not stable since buyer 2 would be willing to pay more than $1200 for the item. Thus, if the two buyers compete, buyer 2 would never allow buyer 1 to acquire the good for only $1200. Imagine that the three people are in a room negotiating. The negotiations couldn’t end with the seller agreeing to give the good to buyer 1 for $1200 because buyer 2 would offer to pay $1201 before he would ever leave the room empty-handed.

The only stable outcome in our three-person game is for the good to be sold for $1300. The existence of the second buyer gives the seller all the potential profits from trade. Both sellers need the buyer, whereas the buyer needs only one seller. Consequently, if the seller can get the buyers to compete against each other, he can drive down their profits to zero. Of course, if the buyers don’t compete, then they would do much better.

Let’s slightly change the game and assume that buyer 2 values the good at only $1250.

Value of the Good to Buyer 1 = $1300

Value of the Good to Buyer 2 = $1250

Value of the Good to the Seller = $1000

In this game buyer 1 will end up with the good because she would always outbid buyer 2. The sale price will fall between $1250 and $1300. It’s not a stable outcome for the good to be sold for, say, $1230 because the buyer who didn’t get the product would have been willing to outbid her rival. It is stable for the good to be sold for somewhere between $1250 and $1300 to buyer 1 because then buyer 2 wouldn’t benefit from making a higher counteroffer.

Imagine that you are the seller and you get a call from buyer 2 just a day before the start of negotiations. Buyer 2 says that he isn’t going to bother showing up since he knows he will eventually be outbid by buyer 1. It’s entirely rational for buyer 2 to stay home and not waste his time in fruitless negotiations he is destined to lose. As the seller, however, you should be horrified by the prospect of buyer 2 staying home. Without buyer 2, the price will be somewhere between $1000 and $1300. With him, the range contracts to between $1250 and $1300. Consequently, the seller should beg buyer 2 to show up, bribing him if necessary.[4] Of course, buyer 1 should also be willing to bribe buyer 2 not to show. Therefore, even though buyer 2 won’t end up purchasing the good, he could still profit from the negotiations.

In his negotiations with CBS, David Letterman exploited the tactic of increasing the number of buyers. David Letterman hosts a late night comedy show for CBS, and his contract was about to expire. CBS, reportedly, told the talk show host that he had no other place to take his show if he didn’t renew with CBS. David Letterman’s show plays best from about 11:30 to 12:30 p.m., during which time NBC runs the popular Tonight Show and ABC runs the highly respected Nightline. ABC, however, indicated that it would consider dumping Nightline and running Letterman’s show instead. Although Letterman ultimately renewed his contract with CBS, getting ABC to express interest in him no doubt strengthened his bargaining position.

[4]Brandenburger and Nalebuff (1996), 83–85.




Game Theory at Work(c) How to Use Game Theory to Outthink and Outmaneuver Your Competition
Game Theory at Work(c) How to Use Game Theory to Outthink and Outmaneuver Your Competition
ISBN: N/A
EAN: N/A
Year: 2005
Pages: 260

flylib.com © 2008-2017.
If you may any questions please contact us: flylib@qtcs.net