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15.067 | Spring 2011 | Graduate

# Competitive Decision-Making and Negotiation

### Course Description

This course is centered on negotiation exercises that simulate competitive business situations. Specific topics covered include distributive bargaining (split the pie!), mixed motive bargaining (several issues at stake) with two and with more than two parties, contingent contracts and fair division.

The course has two principal objectives: first, to provide you with negotiation tools that enable you to achieve your negotiation objectives in a fair and responsible fashion; second, to “learn by doing.” We provide a forum in which you actively apply these tools to a wide variety of business oriented negotiation settings.

We begin with an easy case to set the stage for more complex negotiation: buying and selling a used car. Then, the owner of a B&B must try to settle a fractious dispute with a coffee chain that is planning to build a restaurant that will obstruct the owner’s ocean view. The slope gets steeper. You will play one of two roles in a series of cases in each of which more than two issues must be resolved. Each role player receives confidential information. A store equipment manufacturer negotiates on delivery time, price and quality with a large retail chain; a silicon wafer chip manufacturer tries to close a deal with a solvent service company; an online vendor of mid-priced wines negotiates sale of the company; two companies negotiate an IT joint venture. You will participate in an email negotiation as either an account manager for a toiletries firm and or as his principal supplier. A venture capitalist must balance relationship capital and financial terms of an investment in a startup. We move to negotiations among more than two parties: an airframe manufacturer’s management team renegotiates a billion dollar engine contract with an airline management team and three unions negotiate terms for privatization of a Welsh water works with the firm’s managing partners.

### Format

There are no quizzes, exams or papers. Your grade depends almost entirely on how effectively you negotiate with sophisticated counterparts—your classmates! Students must complete all negotiation exercises in order to receive a grade for the course. Results of each negotiation are entered on the web site and processed by the TA for summary and discussion the following class period. At the beginning of each class, we debrief the preceding class’s negotiation, discuss principal themes, and then present instructions and a framework for the next negotiation.

### Deliverables

There are three deliverables expected from you in this class.

1. There are two physical deliverables. The first is You! If you are assigned a role and matched up with a negotiation partner, we expect you to show up on time for the negotiation. If you do not do so it is unfair to your partner and to the rest of the class. The second physical deliverable is the outcome of each of your negotiations. Outcomes must be entered on the course web site before the time deadline set for each negotiation.
2. We also expect your active participation in post negotiation debriefings.
3. Thorough preparation for your role as a negotiator is an absolute imperative. The well prepared negotiator has a distinct competitive advantage over a counterpart who is not well prepared. In addition, careful preparation is both respectful to your negotiating counterpart and engenders respect in return.

In order to motivate preparation we require you to respond to a survey prior to each class negotiation. This survey is a quick check on your grasp of key facts of the upcoming negotiation. You are asked to complete the survey and submit it prior to the start of class. Completion of the survey is worth 0.25 Z-score points. (Z-scores are explained shortly). If you do not complete the survey you do not receive any incremental Z-score points.

### Administering Negotiations and Negotiation Logistics

Most negotiations will take place in class and will require that you prepare by doing the assigned readings and carefully study your confidential information.

All of our complex negotiations require that each of you play a specific role. You will be assigned to a role and informed of this assignment in advance, generally the class period before the class at which the negotiation will unfold. In addition to providing general information that is shared by all parties, each role player will be provided with private information that describes needs and aspirations of that role player. Private information may or may not be shared with your negotiation partner(s). While you may verbally, when this is explicitly allowed, share private information, we ask that you do not share the written version of private information for your role provided to you. When we ask that you do not share private information, you are honor bound to do so.

### Grading

Your grade in this course depends exclusively on how well you negotiate with your counterparts. The basic rule governing computation of your grade is that your performance is judged solely in relation to the performance of others who play the same role as you do. For this reason we do not permit students to take this course Pass / Fail.

Example 1: Buying and Selling a Used Car. The Buyer has a best alternative to no agreement as does the Seller. If Buyer and Seller reach agreement, the Seller’s surplus is the dollar amount above her best alternative to no agreement with the Buyer that she negotiates. By symmetry, the Buyer’s surplus is the dollar amount below the maximum that he is willing to pay for the car. The Seller’s surplus is a raw score and the Buyer’s surplus is a raw score.

In order to factor out asymmetries in bargaining power and to standardize scores for grading purposes, we make a list of Seller’s surpluses and a separate list of Buyer’s surpluses. We then compute the mean and standard deviation of Seller surpluses and compute a “normalized” or Z-score for each Seller by subtracting this mean from each element on the list and dividing the resulting difference by the Seller standard deviation.

We do the same for the Buyer. An explicit numerical example is given below.

Example 2: Mixed Motive Bargaining. A mixed motive bargain is one in which you and your counterparts in other roles aim at an agreement that resolves more than one, possibly many, issues. You must manage the tension between creating value for both parties and claiming value. For example, you will undertake the sale of an on-line wine company, WineMaster.com to HomeBase.com. Each side possesses confidential information (“For your eyes only!”) that lays out aspirations and a “bottom line.” This information includes a detailed statement of the “net gain” that each party receives upon reaching agreement. Negotiations of this type are not strictly competitive because by judicious exchange of information both parties may improve their position (score). In addition, there may be asymmetries of power: it may be easy for one party to walk away and hard for the other to do so. Now suppose that WineMaster.com and HomeBase.com negotiate. All of you playing the role of WineMaster.com are negotiating under identical negotiation conditions, so it is reasonable to compare outcomes of negotiations of those who play the role of a WineMaster.com’s negotiator. Reasoning similarly, it is reasonable to compare outcomes of all who play the role of HomeBase.com’s negotiator. The question is “How do we arrive at a score that allows reasonable comparisons among parties playing different roles with different bargaining power and different scoring scales?”

The answer is to compute the Z-score. Here is how it works. Suppose that the average net gain above WineMaster.com’s best alternative to no agreement is found to be $650K with a standard deviation of $1200K. You, as a WineMaster negotiator, have achieved a net gain of $750K. Your Z-score is your raw score, $750K, minus the average of all net gains in your role, $650K, divided by the standard deviation of raw scores achieved by all who played your role, $1200K, or

ZYOU = ($750 — $650) / $1200 = .083.

Your counterpart at HomePage.com achieved a net gain of $1200K. The average of all HomePage.com net gains is $1100K with standard deviation $1600K. Then the Z-score for your negotiating counterpart is

ZCOUNTERPART = ($1200 — $1100) / $1600 = .0625.

You received a recorded score of .083 and your counterpart receives a recorded score of .0625. Both of you scored higher than the mean. These scores are, in part, a measure of your negotiating skill and in part a measure of luck and the particular fashion in which your negotiating style meshed with that of your negotiating partner.

We will change match-ups for each negotiation during the course, so you may expect your good luck and bad luck to average out. To prevent a really unlucky experience from having too large a negative impact on your final average Z-score, we shall drop the worst two Z-scores for each individual. Your final Z-score will be an average of all but the two worst Z-scores that you achieve.

If you miss a negotiation, you will receive -4 as a Z-score. This is ample incentive to make sure that you either agree to negotiate with your counterparts at a time acceptable to the instructors or do the negotiation when assigned.

### Honesty and Learning

You will feel a tension between playing a role “honestly” and simply playing to get the highest Z-score every time. Most of the time you will do as well by employing the guidelines that we develop for creating value and for claiming it while honestly acting in the spirit of the role that you are assigned. You do want to aim for a high Z-score and simultaneously stay within your role and the rules of the game. Of course, it is possible to cheat on this. You and your partner(s) can collude to break the rules or, for example, you might ask others who have taken the course earlier how they negotiated a particular exercise. But when you do, you deprive both yourself and your negotiating partner of a valuable learning experience. This type of behavior is more than inappropriate—it is a violation of trust. As a colleague says, “Such behavior is completely inappropriate and we urge you not to try it. Doing so devalues your own experience, spoils things for other students and deadens the discussion.” More often it is fun to negotiate in a setting where the stakes are not high (your job doesn’t depend on the outcome!). We ask you to “stretch yourself” and experiment with different negotiation styles. You may discover that you have untapped potential.

### List of Topics

1. Distributive Bargaining
   - Street Streaker: Buying and selling a used car
   - Salt Harbor
2. Competitive Gaming
   - Oil Price Negotiation: Iterative multi-person prisoner’s dilemma
3. Fair Division
   - Equitable Division of an Art Collection - The Rothman Family
   - Calculating the Efficient Frontier
4. Contingent Contracts
   - Jessie Jumpshot
5. Integrative Bargaining
   - Nelson Contracting
   - Alphexo vs. Betonn (negotiating an IT joint venture)
   - WineMaster.com (negotiating sale of an online wine enterprise)
   - CP Hong Kong vs. MegaMarket U.S.A. (an e-mail negotiation)
6. Balanced Concerns Negotiations
   - The Stakes of Engagement (negotiating a pre-nuptial agreement)
   - Aerospace Investment (a VC negotiates terms with a start-up)
7. Many Party Negotiations
   - Eureka vs. Flagship (an airplane engine manufacturer’s team and an airline team must renegotiate of a billion dollar contract)
   - Welsh Water (a recently privatized Welsh waterworks negotiates with three unions)

## Course Info

##### Instructor

- Prof. Gordon Kaufman

##### Departments

- Sloan School of Management

##### As Taught In

Spring 2011

##### Level

Graduate

##### Topics

- Business
  - Business Ethics
  - Management

##### Learning Resource Types

notes Lecture Notes
assignment Activity Assignments

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