Chapter 14: Negotiations

Overview

In a negotiation, he who cares less, wins.^[1]

The two of you can share a pie but only after agreeing on how to divide it. Often it’s clear that players would benefit from collaborating, but it’s not obvious how the fruits of this collaboration should be shared.

Consider a simple game where a seller owns a good that is worth $1000 to him but $1300 to a buyer.

Value of Good to the Buyer = $1300

Value of Good to the Seller = $1000

We can make two inferences about negotiations between these parties:

• Both parties have the potential to benefit from trade.

• If the buyer acquires the good, he will pay between $1000 and $1300.

Parties can always benefit from trade when a potential buyer values the good more than the potential seller does. Whenever you consider bargaining with someone, you should first identify whether there are any possible gains from trade. If the good in our example was worth less than $1000 to the buyer, then the parties should not bother negotiating.

Given that the buyer values the good more than the seller does, how much will it be traded for? We can’t tell without more information. We can, however, use the values the parties place on the good to determine its potential sale price range.

Since neither party will agree to an arrangement that makes him worse off, the seller will never accept less than $1000, and the buyer won’t ever pay more than $1300. The amounts of $1300 and $1000 represent the buyer’s and seller’s respective walking away prices. Assuming that the two parties come to a deal, neither party will ever have to walk away. What would have happened if a party had walked away, however, is critical in determining the parties’ negotiating strength. Consequently, the party who cares least about the negotiations succeeding has an advantage, for he would be hurt less by walking away.

Armies frequently launch attacks just before starting peace talks.^[2] Even if both sides expect the peace talks to succeed, they still have massive incentives to carry out a successful strike before the talks to increase their negotiating strength. Similarly, even if you are certain you can negotiate some deal, you still should establish that you would do well if the deal fell through.

^[1]Boone (1999), 113.

^[2]McMillan (1992), 49.