I
THE DYNAMICS OF NEGOTIATION
In Part I we outline the three tensions inherent in negotiation, whether the goal is to make a deal or settle a dispute. The problem-solving negotiator cannot make these disappear, no matter how skilled she may be. The best she can hope to do is manage the three tensions effectively.
The first tension is between the desire for distributive gaināgetting a bigger slice of the pieāand the opportunity for joint gainsāfinding ways to make the pie bigger (Chapter 1). Information drives this tension. Without sharing information, it is difficult to find trades that might create value and potentially make both negotiators better off. But if unreciprocated, openness can be exploited. Disclosing oneās preferences, resources, interests, and alternatives can help to create value but may pose a grave risk with respect to distributive issues. Negotiators are constantly caught between these competing strategic demands. Ultimately, an individual negotiator is typically concerned with the size of her slice, and only secondarily concerned with the size of the pie as a whole. Indeed, a negotiator who can easily claim a large share of a small pie may wind up with more to eat than one who helps bake a much bigger pie but ends up with only a sliver. A skillful negotiator moves nimbly between imaginative strategies to enlarge the pie and conservative strategies to secure an ample slice no matter what size the final pie turns out to be.
The second tension is between empathizing with the other sideādemonstrating an understanding of the other personās interests and point of viewāand asserting your own views, interests, and concerns (Chapter 2). This is an experiential tension. Often negotiators feel as if they must either assert themselves or listen to the other side, but they canāt do both. Skilled negotiators know that both of these very different interpersonal skills are critical to effective negotiation. On the one hand, it is essential that a negotiator assert her needs, goals, and point of view; good negotiators are masters of the art of persuasionāof getting other people to see things their way. On the other hand, the best negotiators also have the capacity to demonstrate their understanding of the other sideās needs, interests, and perspectivesāwhat we mean by empathy. The tension between assertion and empathy arises because most negotiators find it difficult to excel at both. Assertion without empathy risks escalating conflict, while empathy without assertion risks jeopardizing oneās legitimate concerns.
The third tension exists whenever an agent negotiates on behalf of a principal, and it arises because agents have interests of their own (Chapter 3). In the legal context, a lawyer acts as agent for her client. But the principal-agent tension can exist in a much broader range of relationships as well: when an employee negotiates on behalf of her company, a manager for her division, a diplomat for his nation, or a parent for her child. In each of these situations, one person speaks and acts on behalf of others. Employees, managers, diplomats, and lawyers all worry about their own careers, reputations, and incomeāas well as the needs of their principals. In other words, the interests of principals and agents rarely are perfectly aligned, and the agentās interests may, to a greater or lesser degree, affect the agentās behavior in ways that do not serve the principalās interests. This tension is driven by the inevitable differences in incentives and information that exist whenever one person delegates a task to another. No fee structure or monitoring system can eliminate it entirely, but some methods of managing the principal-agent tension work better than others.
1
The Tension between Creating and Distributing Value
Jim West needs to find an apartment. After visiting several places and finding nothing he likes, he stumbles across an ad in his local paper that looks enticing. One walkthrough with the listing agent convinces him: this is the place. Although the $1,200 rent is more than he had hoped to pay, the apartmentās high ceilings and cozy fireplace make him believe he could feel at home here. Jim arranges to meet with the owner of the condominium, Sara Grier. Jim learns that Sara is moving to France for a year to teach at a French business school. As they discuss various details in the lease, Jim wonders whether Sara intends to leave any of her furniture. He has some furniture of his own, but he doesnāt have a bedroom set, a desk, or lamps and rugs. Politely, Jim inquires whether Sara plans to store her beautiful antique bed and dresser or whether she will be taking the furniture with her.
SARA: Iām not sure. But my agent told me I could rent the apartment fully furnished for about $1,700 a month.
JIM: Whew. That would be way more than I could afford. $1,200 is already a stretch. But it sure would be great not to have to scrounge for a bed somewhere. And your fireplace andirons are really nice; Iād rather not have to buy stuff like that. So if youāre just going to end up paying to store those things . . .
SARA: I suppose I could leave some of the furniture. For a price.
THE GOAL: CREATING VALUE THROUGH PROBLEM-SOLVING NEGOTIATION
Whatās going on in this negotiation between Jim and Sara? Whatās at stake, and how can we better understand the dynamics at work?
Jim and Sara are engaging in the central activity in problem-solving negotiation: the search for value-creating trades that can make one or both parties better off. Jim needs an apartment. Sara has one to rent. Jim has a couch and a dining room table but no bed. Sara has a bed and nowhere to store it. Through negotiation they may be able to capitalize on their different interests, resources, and capabilities and discover agreements that expand the pie. If they can reach a deal in which Jim uses some of Saraās furniture in return for a slightly higher rent, their lease will be more economically efficient than if they ignore the possibility of this trade and Jim simply leases the place unfurnished.
What do we mean by creating value? By definition, whenever thereās a negotiated agreement, both parties must believe that the negotiated outcome leaves them at least as well off as they would have been if there were no agreement. In this narrow sense, any negotiated outcome, if better than your best alternative away from the table, could be said to create value. In this book, however, when we talk about creating value, we typically mean reaching a deal that, when compared to other possible negotiated outcomes, either makes both parties better off or makes one party better off without making the other party worse off.1 Assume that Jim would prefer to rent Saraās apartment unfurnished for $1,200 rather than to pursue other alternatives. If they were to agree to this simple transaction, Jim knows he would have to spend at least $2,000 purchasing the furniture he needs, and Sara knows that she will have to spend $100 a month to store the items she doesnāt plan to take with her. If Sara and Jim strike a deal in which Sara leaves some of her furniture and Jim pays her something extra per month to use it, each side is better off.
Jim and Sara are both able negotiators, and they expect that their negotiation might present value-creating opportunities. So they search for these opportunities during their discussion:
JIM: OK, it makes sense that if you leave your furniture, Iāll compensate you somehow. But before we get to that, letās talk seriously about what would work for each of us here. Iāll be up frontāI could really use all the furniture in your bedroom, and it would be nice to have the desk as well. What are your thoughts on leaving the furniture or taking it?
SARA: I havenāt figured all that out yet. Iām really pretty flexible. I was going to store some of it and give some to friends. But Iād rather not have to go through the hassle of moving it and storing it.
JIM: Yeah, thatās what I figured. I donāt need your couch or dining room table, or most of the other furniture in the living room. Iāve got one sofa Iāll be bringing with me, and a lot of other furniture in storage that I inherited recently, including a living room set that Iād like to use. So Iām pretty set there.
SARA: Whereās your storage facility?
JIM: Right downtown. I moved all of my grandmotherās furniture here from Albany when she moved into a retirement home.
SARA: So when you move the living room set out, youāll have some extra space in that storage unit, wonāt you?
JIM: Actually, I already have some extra space. Are you thinking we could share the storage unit?
SARA: That might work really well. I wouldnāt have to rent a whole unit by myself. Most of the units Iāve seen are just too big for my needs anyway.
JIM: Great. And maybe we could use the same mover and save some money there, too.
Sources of Value
To understand how to uncover value-creating trades, it helps to have a basic sense of their economic underpinnings. Here we first explore three sources of value in negotiation. Later we add a fourth.
ā¢ Differences between the parties
ā¢ Noncompetitive similarities
ā¢ Economies of scale and scope
DIFFERENCES BETWEEN THE PARTIES
The notion that differences can create value is counter-intuitive to many negotiators, who believe that they can reach agreement only by finding common ground. But the truth is that differences are often more useful than similarities in helping parties reach a deal.2 Differences set the stage for possible gains from trade, and it is through trades that value is most commonly created. Consider the following five types of differences:
Different Resources: In the simplest example, two parties may simply trade resources. A vegetarian with a chicken and a carnivore with a large vegetable garden may find it useful to swap what they have. Likewise, Jim might trade some of his storage space for Saraās bedroom furniture.
Different Relative Valuations: Even if both parties have chickens and vegetables, and both prefer chicken to some extent, they can still make useful trades. To put it in economic terms, if the two parties attach different relative valuations to the goods in question, trades should occur that make both better off. The party who more strongly prefers chicken to vegetables should be willing to pay a high enough priceāin terms of vegetablesāto induce the other party to give up at least some of her chickens.
Different Forecasts: Parties may have different beliefs about what the future will hold. In the entertainment industry, for example, performers, agents, and concert halls often have different predictions about the likelihood of various attendance levels. Performers are often convinced of their ability to draw huge crowds, while concert halls may be much less sanguine. By trading on these different forecastsāperhaps through contingent fee arrangementsāthe parties can resolve these differences to mutual advantage. A singer who expects to draw a standing-room-only crowd might agree to a guaranteed fee based on 80 percent attendance, plus a percentage of any profits earned from higher attendance. Such arrangements allow the parties to place bets on their different beliefs about the future.
Different Risk Preferences: Even if the parties have identical forecasts about a particular event, they might not be equally risk-tolerant with regard to that event. My life insurance company and I might have similar expectations about what the odds are that someone my age will die within the next year. But we will probably have very different risk preferences regarding that possibility. I will be risk-averse, knowing that my family will face financial hardship if I die. Therefore, I might pay the insurance company to absorb that risk. The insurance company, by pooling my risk with the risk of others, can offer me insurance based on costs averaged over the entire pool. In effect, I have shifted the risk of my early demise to the more efficient risk carrierāthe insurance company. Negotiators often create value in this way. A car buyer might purchase an extended warranty, or a start-up company might sell shares to a wealthy investor in exchange for needed capital. In each case, by allocating risk to the more risk-tolerant party for an acceptable price, the parties create a more beneficial agreement.
Different Time Preferences: Negotiators often value issues of timing differentlyāwhen an event will occur or a payment will be made. For example, a law school graduate and his wife fell in love with a condominium in Washington, D.C. Because he was going to be clerking for a federal judge for two years, his salary during that time was not sufficient to cover the mortgage payments. After the clerkship, however, he knew that he would be joining a large D.C. law firm, at more than twice his clerkship salary. He could then easily afford the house. The solution lay in structuring a mortgage schedule so that there were small payments for the first two yearsāless than even the interest costsāand larger payments thereafter. Although he had to pay a premium for agreeing to this tiered payment schedule, in the meantime he was able to āaffordā his dream home.
Similarly, Jim and Sara might have different preferences about when Jim moves into the apartment. Although a standard lease would begin on the first of the month, Jim may need to move in earlier. If it is worth more to Jim to move in early than it costs Sara to move out early, they may agree to accommodate Jimās schedule in exchange for compensation to Sara.
These five types of differencesāin resources, relative valuations, forecasts, risk preferences, and time preferencesāare all potential sources of value creation. They all support the same basic principle: trades can create value.
NONCOMPETITIVE SIMILARITIES
In some instances, parties have similar interests that truly do not compete, in that one personās gain does not mean the otherās loss. For example, negotiators often have a shared interest in a productive, cordial working relationship. To the extent that they can improve their relationship, both gain. Likewise, parents generally share an interest in the well-being of their children. If a child flourishes, both parents derive satisfaction. Thus, even for divorcing parents, arrangements that benef...