Chapter 3Chapter 3

Distributive Distributive BargainingBargaining

Distributive BargainingDistributive Bargaining

Defined:Defined:

““A negotiation method in which two A negotiation method in which two parties strive to divide a fixed pool of parties strive to divide a fixed pool of resources, each trying to maximize resources, each trying to maximize

its share of the distribution”its share of the distribution”

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Distributive BargainingDistributive Bargaining

Also commonly known Also commonly known as:as:

A “fixed-sum” A “fixed-sum” processprocess

A “zero-sum” processA “zero-sum” process ““Win-lose” bargainingWin-lose” bargaining ““Hard bargaining”Hard bargaining”

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Why?Why?

Because many situations are Because many situations are perceived as single issue – money – perceived as single issue – money – and each dollar “gained” by one and each dollar “gained” by one party is “lost” by the other partyparty is “lost” by the other party

Easily identified example: the Easily identified example: the negotiated sale of a big-ticket item negotiated sale of a big-ticket item (house, car) between a seller and a (house, car) between a seller and a buyerbuyer

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Three Components of a Three Components of a Distributive Bargaining Distributive Bargaining

ModelModel1. The parties view each other as 1. The parties view each other as

adversariesadversaries

2. The objective of both parties is to 2. The objective of both parties is to

maximize their self-interest,maximize their self-interest, or share of or share of

“ “the pie”the pie”

3. The parties are only concerned about the 3. The parties are only concerned about the

content of the content of the current negotiationcurrent negotiation and act as and act as if if

they expect no future relationshipthey expect no future relationship

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Five Negotiation SkillsFive Negotiation Skills Skill 3.1: Recognize a Skill 3.1: Recognize a distributive distributive

bargainingbargaining situation’s three key situation’s three key componentscomponents

Skill 3.2: Determine a Skill 3.2: Determine a reservation pricereservation price Skill 3.3: Use Skill 3.3: Use bracketingbracketing of the other of the other

party’s offerparty’s offer Skill 3.4: Recognize and use Skill 3.4: Recognize and use social social

normsnorms to evaluate offersto evaluate offers Skill 3.5: Learn the Skill 3.5: Learn the framingframing of offers to of offers to

influence how they are perceivedinfluence how they are perceived

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Chapter Case: Buying a Work of Chapter Case: Buying a Work of ArtArt

Successful California artist Chris Successful California artist Chris Comte has a painting titled “Comte has a painting titled “Sunday” Sunday” on on display indisplay in her studioher studio

A vacationing couple from Texas A vacationing couple from Texas admire the painting one day, and admire the painting one day, and return the next to offer Chris $7,500. return the next to offer Chris $7,500. The listed price is $12,500 and Chris The listed price is $12,500 and Chris tells them it is one of her best workstells them it is one of her best works

Why is this a distributive bargaining Why is this a distributive bargaining situation?situation?

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Classic Distributive Classic Distributive Bargaining ModelBargaining Model

0_____0_____ss________________xx________________bb_______$$_______$$

s s = seller’s reservation price (min. price)= seller’s reservation price (min. price) bb = buyer’s reservation price (max. price) = buyer’s reservation price (max. price) x = x = negotiated price or final agreementnegotiated price or final agreement ZOPA = zone of possible agreement = s-b ZOPA = zone of possible agreement = s-b

(bargaining range or settlement range)(bargaining range or settlement range)

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““The Negotiation Dance”The Negotiation Dance”

Inexperienced negotiators often use the Inexperienced negotiators often use the classic distributive bargaining modelclassic distributive bargaining model

They start with opening offers and then They start with opening offers and then “dance around” with counteroffers until “dance around” with counteroffers until one near “x” is agreed uponone near “x” is agreed upon

Why is this often NOT a good strategy?Why is this often NOT a good strategy?

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The Importance of The Importance of Information (cont.)Information (cont.)

Skilled negotiators utilize information to Skilled negotiators utilize information to support their offers or diffuse other support their offers or diffuse other offers offers

Three types of information:Three types of information: Relational: Focus on relationship between Relational: Focus on relationship between

the partiesthe parties Example: “How can you trust this is your best Example: “How can you trust this is your best

price?”price?”

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The Importance of The Importance of InformationInformation

Substantive: Use of facts, reason, and Substantive: Use of facts, reason, and logiclogic Example: “Our price is based on the Example: “Our price is based on the

bank’s approval loan limit”bank’s approval loan limit” Procedural: Discuss the processProcedural: Discuss the process

Example: “We will engage in Example: “We will engage in discussions after we receive certain discussions after we receive certain information” information”

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Opening OffersOpening Offers

The most The most critical stepcritical step in negotiations in negotiations Yet … successful negotiators are split Yet … successful negotiators are split

on strategy:on strategy: Many prefer to Many prefer to makemake the opening offer the opening offer

while others prefer to while others prefer to receive receive the the opening offer!opening offer!

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Opening Offers (cont.)Opening Offers (cont.)

AnchoringAnchoring = the = the first number on the first number on the table may “anchor” table may “anchor” the entire the entire negotiationnegotiation Why? People often Why? People often

fixate on itfixate on it

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Opening Offers (cont.)Opening Offers (cont.)

Three types of opening offers which Three types of opening offers which can anchor the negotiationscan anchor the negotiations Facts: “The average price paid in the Facts: “The average price paid in the

past year is $350,000”past year is $350,000” Extreme: “This is the most valuable lot Extreme: “This is the most valuable lot

and home in the entire neighborhood!”and home in the entire neighborhood!” Precedent: “My last supervisor always Precedent: “My last supervisor always

gave me the highest rating”gave me the highest rating”

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Inexperienced Inexperienced NegotiatorsNegotiators

May Easily Let the Opening Offer May Easily Let the Opening Offer Anchor the DealAnchor the Deal

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BracketingBracketing Defined: The logical process of Defined: The logical process of

moving toward a middle point moving toward a middle point between the opening offers between the opening offers Example: Seller’s listed price = $15,000; Example: Seller’s listed price = $15,000;

buyer desires to pay $13,000, thus buyer desires to pay $13,000, thus opens with $11,000opens with $11,000

Thus, a negotiator may “bracket” the Thus, a negotiator may “bracket” the other party’s opening offer by setting other party’s opening offer by setting their own opening offer the same their own opening offer the same distance away from the desired valuedistance away from the desired value

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Two-Party, Single-Issue Negotiation: A Work of Art

““Traps to Avoid” Traps to Avoid” Responses to an Responses to an

“Extreme” Opening Offer“Extreme” Opening Offer Recognize it: as a “tactic,” not an Recognize it: as a “tactic,” not an

insultinsult Label it: “Outrageous” “Ridiculous”Label it: “Outrageous” “Ridiculous” Follow up: with your own opening Follow up: with your own opening

offer anchored by facts, precedent, offer anchored by facts, precedent, and other informationand other information

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Social NormsSocial Norms After opening offers, how can parties distribute After opening offers, how can parties distribute

the possible gain available to both sides?the possible gain available to both sides? Negotiators often Negotiators often frame their offersframe their offers by by

utilizing social norms:utilizing social norms: Relational: desire to maintain a positive relationshipRelational: desire to maintain a positive relationship Fairness: four variationsFairness: four variations

Equality: “50-50” or “split the difference”Equality: “50-50” or “split the difference” Equity: proportional effort, inputsEquity: proportional effort, inputs Need: proportional needsNeed: proportional needs Status quo: keep current situationStatus quo: keep current situation

Reciprocity: respond to the change from a previous Reciprocity: respond to the change from a previous offer with an equal change in your next counteroffer with an equal change in your next counter

Good faith: meet and discuss options; favor offers; Good faith: meet and discuss options; favor offers; use informationuse information

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Does a Social Norm Provide Does a Social Norm Provide the “Fairest” Settlement?the “Fairest” Settlement?

““The Consistency Principle”: people The Consistency Principle”: people need consistency and fairness in the need consistency and fairness in the negotiation process negotiation process

The fairness norms may be the most The fairness norms may be the most commonly utilizedcommonly utilized

Which settlement values between Which settlement values between $7,500 and $12,500 is “fairest”? $7,500 and $12,500 is “fairest”? “best”? “right”?“best”? “right”?

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How Norms May Affect Counteroffers

CounteroffersCounteroffers Framing: a key negotiation skill Framing: a key negotiation skill Defined: The wording or context of an Defined: The wording or context of an

offeroffer Why framing is a key skillWhy framing is a key skill

““While facts and numbers are important, While facts and numbers are important, people attach significant meaning to people attach significant meaning to words, which affects their views of a words, which affects their views of a proposal”proposal”--Theodore Kheel, --Theodore Kheel, The Keys to Conflict The Keys to Conflict

ResolutionResolution

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Tactics for Success:Tactics for Success:“Wait to Counter”“Wait to Counter”

When receiving an offer wait a respectful When receiving an offer wait a respectful period before responding period before responding

Why?Why? A quick response implies you did not seriously A quick response implies you did not seriously

consider the offerconsider the offer The other party will feel better about the process The other party will feel better about the process Gives you time to develop a positive response:Gives you time to develop a positive response:

““We considered your offer and appreciate the We considered your offer and appreciate the movement on your part. We ask that you seriously movement on your part. We ask that you seriously consider our counteroffer…”consider our counteroffer…”

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Four Types of FramesFour Types of Frames(applied to the Chapter Case)(applied to the Chapter Case)

ReframingReframing: “This work is a solid investment – : “This work is a solid investment – the only other Ireland piece by this artist just the only other Ireland piece by this artist just sold at auction for $20,000”sold at auction for $20,000”

Focus framingFocus framing: “This is the only painting of a : “This is the only painting of a lake the artist has done, and he’ll probably lake the artist has done, and he’ll probably never get back to Ireland to paint another”never get back to Ireland to paint another”

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Contrast framingContrast framing: “If you pay for it over : “If you pay for it over 24 months, the cost per month is less 24 months, the cost per month is less than the price of four tickets to a first-run than the price of four tickets to a first-run play, but you will enjoy the painting for play, but you will enjoy the painting for many years”many years”

Negative framingNegative framing: “You can wait to : “You can wait to decide – but another couple looked at it decide – but another couple looked at it earlier today and said they would be earlier today and said they would be back”back”

Four Types of FramesFour Types of Frames(applied to the Chapter Case)(applied to the Chapter Case)

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Four Types of Frames Applied to Chapter Case

Reframing OfferReframing Offer William Ury, William Ury, Getting Past NoGetting Past No, suggests , suggests

that negotiators never say no or reject an that negotiators never say no or reject an offer instead they offer instead they reframereframe by using by using questions:questions: Ask why: “Why did you select that exact Ask why: “Why did you select that exact

number?”number?” Ask why not: “Why not ask for an estimate Ask why not: “Why not ask for an estimate

from a professional appraiser?”from a professional appraiser?” Ask what if: “What if we agree to your price, Ask what if: “What if we agree to your price,

but you paid for delivery and warranty?”but you paid for delivery and warranty?” Ask for advice: “How would you suggest I Ask for advice: “How would you suggest I

present this offer to my boss when she has present this offer to my boss when she has rejected that price?”rejected that price?”

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Reframing Personal Reframing Personal AttacksAttacks Personal attacks have become a common Personal attacks have become a common

tactic –don’t let emotions take over strategytactic –don’t let emotions take over strategy How?How?

Prepare: Expect personal attacks, control Prepare: Expect personal attacks, control your emotionsyour emotions

Recognize: The other party needs to “blow Recognize: The other party needs to “blow off steam”off steam”

Reframe: Ignore the attack on you, Reframe: Ignore the attack on you, reframe it on the problemreframe it on the problem

Silence: Communicates your displeasure Silence: Communicates your displeasure and can be a powerful tooland can be a powerful tool

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Final Negotiated PriceFinal Negotiated Price Shaking hands and exchanging a Shaking hands and exchanging a

product for money ends many product for money ends many negotiationsnegotiations

Contingency contracts should be Contingency contracts should be used if future event may alter the used if future event may alter the agreement or keep it from being agreement or keep it from being signedsigned

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Negotiated SettlementNegotiated SettlementChapter Case “Buying a Work of Art”Chapter Case “Buying a Work of Art” Opening offers: Buyers = $7,500Opening offers: Buyers = $7,500

Seller =$12,500Seller =$12,500 Reservation prices: Buyers = $11,000Reservation prices: Buyers = $11,000

Seller = $8,000Seller = $8,000

(ZOPA) = $8,000 - $11,000(ZOPA) = $8,000 - $11,000 Seller’s 1Seller’s 1stst counteroffer = $11,000 (framed by counteroffer = $11,000 (framed by

citing the number of hours invested = need citing the number of hours invested = need norm; similar to three others sold = equity norm; similar to three others sold = equity norm)norm)

Buyer’s 1Buyer’s 1stst counteroffer = $9,250 counteroffer = $9,250

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Negotiated SettlementNegotiated Settlement

Seller’s 2Seller’s 2ndnd counteroffer = $10,000 counteroffer = $10,000 ($1,000 concession)($1,000 concession)

Buyers acceptBuyers accept Negotiated price = X = $10,000Negotiated price = X = $10,000 Seller’s gain = $2,500 over buyer’s Seller’s gain = $2,500 over buyer’s

opening offeropening offer Buyers’ gain = $2,500 less than Buyers’ gain = $2,500 less than

seller’s listed priceseller’s listed price

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Negotiation Settlement: A Work of Art