MANAGERIAL DECISION MAKING

B.  Bargaining and Negotiation

1.  Economic forces underlying bargaining

a.  Basic concepts

• Reservation (walk-away) prices - values that buyers and sellers put on a transaction

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• Zone of agreement - range between buyer and seller reservation prices

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• Payoff frontier - profit implications for all combinations within the zone of agreement

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• Efficient outcome - no other outcome is better for both parties

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b.  Resolving disputes

Ex. - Management-labor, international disputes, regulators and business, legal disputes

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c.  Factors leading to differences in values

(1)  Probability assessments

• Parties may differ in probability assessments and forecasts

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(2)  Risk aversion

• Parties may have different attitudes towards risk

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• Risk should be assumed by the party best able to bear it

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• Risk sharing - optimal response when both parties are risk averse

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d.  Contingent contracts

• Leads to risk being shared by the parties

Ex. - Cost-plus contracts, variable rate mortgages

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e.  Multiple-issue negotiations

Ex. - Price, performance specifications, service requirements, product attributes

• Find optimal agreement, not just any agreement
  
  
• Maximize total value for the parties in the agreement

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2.  Negotiation strategy

• Negotiation involves both cooperation and competition
  
  
• Difficult to predict equilibrium outcome - depends on expectations of parties

a.  Perfect information

• An efficient agreement should be reached if both sides have perfect information

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b.  Imperfect information

• Optimal bargaining behavior is incompatible with achieving efficient agreements all of the time
  
  
• Some information kept hidden

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3.  Impact of technology

a.  Searching for best price

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b.  On-line auctions

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c.  Electronic exchanges

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d.  Repetition and reputation

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Ex. - David Letterman

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