Page 191 - DMGT519_Conflict Management and Negotiation Skills

Unit 9: Distributive Bargaining

Notes
wildflower garden behind them. The painting is simply titled Sunday. A retired couple
from Texas is vacationing in the area for a few days and by chance stop in the studio. While
browsing they pause to admire Sunday. The next day they decide to return to the studio
and possibly buy the painting. The listed price is $12,500. The buyers believe they cannot
afford to pay the asking price, and have decided to offer $7,500, knowing that artists often
negotiate the price of their works. It is a classic distributive bargaining situation. The only
real issue is price. Both parties would like to make a deal, but both also know they can
walk away from the deal.

9.2 Classic Distributive Bargaining Situation

The classic distributive bargaining situation is one that everyone has experienced. The issue is
between company and client. The company and client do not know each other directly. The only
issue to be negotiated is clients demands of reduction in price. The goal of the client is to get the
material in reduced price and the goal of the company is to sell it on maximum price. Both view
the situation as Win-Lose Bargaining. It is important to consider that in most such distributive
bargaining situations, there actually is no “fair” or “best” price. What is a house worth? It’s
worth whatever price the two parties will agree upon.
Howard Raiffa, in his classic book The Art and Science of Negotiation, provides an analytical model
of this classic distributive bargaining situation. Raiffa explains that when the two parties enter
discussion, each has some idea of what they consider to be their reservation price—the absolute
minimum price that the seller will accept or the absolute maximum price that the buyer is
willing to pay. Let’s call the seller’s reservation price s and the buyer’s reservation price b. What
happens if negotiators do not decide their reservation price before the negotiation begins? They
will be at a real disadvantage because they may easily agree to what they will later admit to
being too much or too little because they were “caught up in the heat of the negotiation.”
Unfortunately this is not a rare situation.
For sellers, the BATNA or s is the price at which they will simply continue to seek another buyer,
and for buyers the BATNA or b is the price at which they will look for another car to buy. If b is
larger than s—that is, if the buyer’s maximum price is greater than the seller’s minimum price—
then there exists a zone of possible agreement (ZOPA), also called the bargaining range, negotiating
latitude, or settlement range because any offer outside of the range will be quickly rejected by one
of the parties. The ZOPA exists because the buyer is willing to meet or exceed the seller’s
minimum price.
However, the mere existence of a positive ZOPA does not guarantee that an agreement will be
reached. After all, negotiators do not usually share with each other their reservation prices and
thus may not realize that a range of possible settlement prices exists, and in fact they may not
reach agreement if they are poor negotiators. Also consider what happens if s is greater than b.
Then the seller’s minimum acceptable price is higher than the buyer’s maximum price, and thus
no ZOPA exists, and no agreement can be reached.

9.3 Opening Offers

Whether negotiators are engaged in the negotiating process of acquiring a new business, a
revised wage agreement, or buying a property, one of the negotiators has to make the first offer.
The million-dollar questions are:

1. Who should make the first offer, and
2. How will making or not making the first offer affect the negotiation process and the
result?

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