The essence of a lot of distributive bargaining is the attempt on the part of negotiators to shape each other’s perceptions of what is possible. When deciding what action to take, each player must consider the other’s possible reaction, and vice versa. This is strategic interdependence. Each negotiator is constantly assessing what the other side might eventually be willing to do—how far they may go. For example, Jim wants to assess how little Sara might accept. At the same time, Sara is trying to influence Jim’s perception of what that amount is. Conversely, Sara is trying to determine how much Jim might be willing to pay, knowing that he will want to influence that perception in a way favorable to himself. And so on.
Negotiators employ a variety of tactics to influence the other side’s perceptions—some misleading, some outright dishonest. Sara might mislead Jim if he asks about her best alternative. She might claim—untruthfully—that she has another offer for $9,195 and imply that she won’t accept less than that amount. Jim might pretend that he is willing to invest hundreds of hours in searching for a real bargain, seeking to influence Sara’s perception of his willingness to hold out for a very favorable price. Jim may misstate his preferences, indicating that he really prefers a Toyota but is reluctantly willing to consider a Honda if necessary. Such moves are common bargaining tactics.
TEN COMMON HARD-BARGAINING TACTICS
We generally do not recommend hard-bargaining tactics as an approach to negotiation. The costs are often high and the risks substantial. But it is important for negotiators to understand such maneuvers and not be caught unprepared. To that end, we often ask lawyers and business-people to describe the most common difficult tactics they have encountered in negotiation. The following is the Top 10 list we have compiled from these responses and our own experience:
(1) Extreme claims followed by small, slow concessions: Aiming high (or low) and conceding slowly. This may be the most common of all hard-bargaining tactics, and it has undeniable advantages. Chiefly, it protects the user from giving away too much surplus at the start. Experimental research also suggests that an ambitious initial demand tends to anchor the other negotiator’s perceptions of the bargaining range—even though the other side knows full well that the opening demand is probably a self-serving gambit that conceals the offerer’s true reservation value.6 But this tactic has two disadvantages: it lessens the chances that any deal may be made and it invites protracted haggling.
(2) Commitment tactics: Committing to a course of action that ties one’s hands, thus forcing the other side to accommodate; limiting one’s freedom of action in order to influence the other side’s view of what agreements are possible. To be effective, a commitment must seem “binding, credible, visible, and irreversible.”7
(3) Take-it-or-leave-it offers: Stating that one’s offer is non-negotiable—that the negotiation will end if it is not accepted. Like commitment strategies, the risk is that no deal will be made if both parties play chicken. Moreover, take-it-or-leave-it offers can often be countered simply by making some other offer.
(4) Inviting unreciprocated offers: Asking the offerer to bid against himself. Instead of meeting an offer with a counter offer, the hard bargainer indicates that the first offer is insufficient and requests a better offer.
(5) Flinch: Piling one demand on top of another until the other side makes a visible sign that the demands have reached her breaking point.
(6) Personal insults and feather ruffling: Using personal attacks to play on the other side’s insecurities, fluster him, throw him off balance, and otherwise gain psychological advantage.
(7) Bluffing, puffing, and lying: Trying to influence the other side’s perception of what would be acceptable by exaggerating or misrepresenting facts.
(8) Threats and warnings: Promising drastic consequences if one’s demands are not met.
(9) Belittling the other party’s alternatives: Trying to influence the other side’s reservation value by bashing their BATNA.
(10) Good cop, bad cop: Designating one person in a two-negotiator team as the reasonable person who is supposedly trying to help the other side out, while the other negotiator adopts a tough, abrasive manner and pushes for concessions.
A FOURTH SOURCE OF VALUE: REDUCING TRANSACTION COSTS AND DAMPENING STRATEGIC OPPORTUNISM
Hard-bargaining tactics, strategic opportunism, and the problems of information asymmetry all suggest a fourth source of value. Negotiators can create value by reducing the transaction costs of reaching an agreement and by dampening strategic opportunism. This can occur in several ways: by making the process of a negotiation less time-consuming and costly, by reducing the risk that the parties will deceive each other, and by better aligning future incentives.
By reducing transaction costs—in time and money—both negotiators can be better off. This may require neutralizing the other side’s hard bargaining or changing the game to problem-solving (see Chapter 8). Although the transaction costs for Jim and Sara are likely to be fairly low—a matter of a few hours in all events—in more complex deals or legal disputes vast amounts of time and money can be wasted. As we suggest in later chapters, lawyers can create value by resolving legal disputes without protracted and expensive litigation (see Chapter 4).
Negotiators can also create value by reducing the risk of deception and overcoming information asymmetries. For example, recall the lemons problem arising from the fact that Sara probably knows more about the quality of her car than Jim, and that Jim may be skeptical about her claims that the Honda is in great shape.8 If as part of their deal they can figure out an efficient way for Jim to verify or Sara to warrant the quality of the car, they will both be better off.
Box 2
The lemons problem explains why sellers often volunteer their reason for selling. To the extent that Sara has a legitimate motivation for selling now—unrelated to the quality of the car—Jim may be reassured. To the extent Jim remains uncertain about the car’s quality, he would presumably reduce the amount he might otherwise be willing to pay. Paradoxically, Sara would probably improve her chances of selling the car at a favorable price if she reveals that she’s leaving for France and can’t take the car with her. On the other hand, if she discloses the imminence of her departure, Jim might try to exploit her need to sell quickly.
Jim and Sara might try other means of overcoming these quality-related information asymmetries. If Jim could verify Sara’s reputation for honesty and trustworthiness, he might be reassured. Reputation can go a long way to overcome strategic dilemmas. If Sara could give Jim references to six others to whom she’d previously sold automobiles, this would help. But of course Sara is not in the business of selling cars, and there may be no easy way for Jim to check Sara’s general reputation for veracity or fair dealing.
Sara could also signal her confidence in the car’s condition by offering a written ninety-day warranty under which she would reimburse Jim for any necessary repairs during that period. For a single transaction between two private parties this may be impractical. How does Jim know that he’ll be able to find Sara to enforce the warranty, at least at a cost that would be sensible, given the amount at stake? Moreover, for Sara such a guarantee may pose what is called a moral hazard problem. Shifting who bears future risks can create incentives that may affect future behavior adversely. The classic example relates to insurance. If I know that my insurance company will pay the full cost of any damage to my car, I may be more willing to take chances behind the wheel. Likewise, if Sara gives Jim too broad a warranty that covers all costs for an extended period of time, he may have less incentive to take good care of the car himself.
If Jim can’t rely on Sara’s claims about quality, the parties might search for other ways for him to verify the car’s condition. Sara might offer a written representation that she has had the car regularly serviced. Sara might have a complete set of service records and give Jim her mechanic’s telephone number. Alternatively, Sara might invite Jim to take the car to an independent repair shop
of his choosing for an inspection, although presumably this form of verification would impose some costs.
The essential point here is broader than this example. As we’ll see in future chapters, in both deals and disputes, negotiators can often create value by devising cost-effective means of dampening strategic opportunism by reducing the risks of deception and better aligning incentives.
THE APPROACH: MANAGING THE TENSION
We have now arrived at the core of the problem. How can you create value while minimizing the risks of exploitation in the distributive aspects of a negotiation?9
The challenge of problem-solving negotiation is to acknowledge and manage this tension. Keep in mind that this tension cannot be resolved. It can only be managed. The goal is to design processes for negotiation that allow value creation to occur, when possible, while minimizing the risks of exploitation. In this chapter and in Chapters 2 and 3, we offer some general guidelines for an approach that facilitates problem-solving. Our advice concerning the best ways of defending against the risks of exploitation, even in the face of hard-bargaining tactics, is reserved for Chapter 8.
To Prepare
We cannot overstate the importance of preparation—the cornerstone of successful negotiation. Good preparation begins with the following steps, which we will look at in turn:
• Identify the issues and think about interests—yours and theirs
• Contemplate value-creating opportunities
• Know your BATNA and improve it if possible
• Establish an ambitious but realistic aspiration level
IDENTIFY THE ISSUES AND THINK ABOUT INTERESTS—YOURS AND THEIRS
In preparing for a negotiation, an obvious place to start is by thinking about the various issues that might usefully be discussed at the table. Some issues are conspicuous, particularly “the price” or a salient money issue. Jim and Sara know that they’ll need to talk about the price of the car or the rent for the apartment. Other issues may be less obvious. When Jim asks Sara about using her furniture, he broadened the scope of the negotiations by bringing up an additional issue. This is often a useful way to find trades.
Too often, people focus their preparation too narrowly. Imagine, for example, that Stephanie McGrath has been looking for a new job and is about to negotiate for a position she has been offered servicing accounts for the Bradford Advertising Agency. She will obviously want to prepare to talk about salary. Bradford has indicated that it will pay her $95,000 a year, which is a substantial increase over her present earnings of $80,000. But as she prepares, Stephanie realizes that there are a number of other issues involved as well. For example, what will her title be? How will her job be defined? How much vacation will she receive? How much will she be expected to travel? Will the company pay for her moving expenses if she takes the job?
Stephanie should think deeply about her interests vis-à-vis her new job. Interests reflect the concerns and needs underlying bargaining positions. Some are fairly obvious. Stephanie has certain financial interests. Like most people, other things being equal, she would prefer to be paid more rather than less. But when it comes to employment, people have very different interests and priorities. Someone with substantial family responsibilities may have a strong interest in finding employment that offers financial security and predictable hours without much travel. Because Stephanie is only thirty years old, what she cares about most is building her career in advertising over the long term. She has an interest in improving her skills and learning to be an effective manager and leader. Job security is relatively unimportant, but prospects for growth are critical. She also is concerned that her salary fairly reflect current market conditions and signal that she has significant responsibilities at Bradford. She doesn’t mind working long hours, but having at least three weeks of vacation is important to her because she spends time with her family at Christmas and a week in the summer at a family reunion, and she tries to take one week a year to travel to a foreign destination that she’s never visited before. Travel is one of her real passions.
Stephanie also needs to consider what Bradford’s interests might be. In preparation, there is an important difference between thinking about your interests and thinking about the other side’s interests. With thorough preparation you can know your own interests, subject to some change if you learn new information during the course of the negotiation. With respect to the other side’s interests, however, thorough preparation can provide you with no more than a tentative list. A key activity at the table will be to learn from the other side more about their interests to deepen your understanding. Indeed, a critical part of preparation is to think through what questions you will ask to learn the other side’s concerns.
Stephanie can make some informed guesses about Bradford’s likely concerns. The agency may be concerned about setting a bad precedent or making a deal with her that would create problems with other employees. There is probably company policy about benefits, vacation, and moving expenses. Bradford also obviously has financial interests. Other things being equal, they’d probably rather pay Stephanie less than more. On the other hand, she knows the agency has a strong interest in growing the business, securing new clients, and being seen as a “hot” agency, where talented young people want to work. Bradford certainly wants to be perceived in the market as a fair employer.
Certain intangible interests may be important to some degree in almost every negotiation. The parties may have interests in feeling understood or fairly treated. In business deals, the principals may have interests in not losing face and in strengthening their reputation. A client may be concerned about preserving his relationship with the other side, despite their current dispute. Only by thinking about both tangible and intangible interests can you create a complete picture of what is motivating you and the other side.
Box 3
CONTEMPLATE VALUE-CREATING OPPORTUNITIES
Having identified your interests and the likely interests of the other side, you can start thinking about the sorts of value-creating options that you may want to suggest to the other side. For example, because Stephanie is more concerned about career advancement than job security, she may want to propose quarterly performance reviews and a commitment that she would be in her initial job for no more than one year—that it would be up or out.
In her preparation Stephanie might also think about some possible options to resolve the salary difference between Bradford’s initial offer and her aspiration. She wants a higher salary in part because she is confident that she will be able to attract new clients for Bradford, including some accounts she already has in her present job. She may suspect that Bradford is most concerned about setting a bad salary precedent for other new employees, some of whom may not have any clients at all. One solution might be to propose a base salary plus a bonus giving Stephanie an agreed-upon percentage of billings for any new clients she brings in. This salary arrangement takes advantage of two sorts of differences between the parties: differences in predictions (about the certainty that Stephanie will be able to deliver new clients) and differences in resources (her existing relationships with certain clients that Bradford would like to attract).
Both in preparation and at the table, consider the basic sources of value when searching for possible trades:
• Resources: Do you and the other side have different assets that you could trade?
• Relative valuations: Are there things that are valuable to you but less valuable to the other side, and vice versa?
• Forecasts: Do you have different predictions about some future event that you could bet on?
• Risk preferences: Do you have different abilities to absorb risk? Is one person more risk-preferring than the other?
• Time preferences: Do you have different needs concerning when things happen or don’t happen? Are there differences in short-term versus long-term interests?
If the company doesn’t pay moving expenses, Stephanie may want to suggest a one-time signin
g bonus, or perhaps an interest-free loan, to help cover her expenses. These options might better meet Bradford’s concerns. Of course, in preparation you can’t know for sure what the other side’s interests, resources, and capabilities may be, so you won’t be able to identify all the value-creating opportunities that may exist. That must wait until you meet with the other side. Your goal in preparation is to begin to think about what some value-creating opportunities might be. If you have some ideas that sound plausible and attractive to the other side, it will be easier to invite them to problem-solve with you. In addition, by thinking about value creation in advance, you may remind yourself not to focus solely on distribution in your upcoming negotiation.
KNOW YOUR BATNA AND IMPROVE IT IF POSSIBLE
To prepare for managing the tension between creating and distributing value, you must determine the point at which you will walk away from accepting any deal with the other side. How will you know whether to tell the other side, “Sorry, that’s just not good enough. I’m going to have to go elsewhere”? You need to identify your best alternative to a negotiated agreement and how that translates into a reservation value at the table.
In her preparation for negotiations with Bradford, Stephanie thinks about her possible alternatives. She has basically decided that if she doesn’t move to the Bradford Agency, she will stay in her current position with the Ames Agency. The Bradford offer is better than her present position—it pays her more and she would be working under a manager from whom she thinks she could learn a great deal. But negotiation is not a static game. Stephanie may be able to improve her BATNA because of the Bradford offer. Ames may offer her a big promotion to keep her. And this in turn may improve her negotiation with Bradford. This raises an interesting issue of timing. She might want to explore the possibilities of a new position with Ames before trying to close a deal with Bradford. In essence she may create something akin to an auction for her services.
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