MAN712 Game Strategies in Negotiation ESSAY

MAN712 Game Strategies in Negotiation

Game Strategies in Negotiation

It is helpful to think ahead of time about how you and your negotiating opponent may act during negotiations. Offers and counteroffers can be represented in a game tree. A typical game tree looks like Figure 1. This diagram illustrates salary offers made by an employer and possible responses from the employee. In this example, the value of the employee’s services to the employer is $50,000. The employer is trying to decide between two possible salary offers to the employee. One salary offer is a low-ball offer (quite a bit lower than what might be expected) of $40,000. If the employee accepts this amount, it would result in greater net value to the employer ($50,000-$40,000 = $10,000). There is a risk, however, that the employee might reject the salary offer and take another job somewhere else. The employer also expects that the employee might come back with a counteroffer.

The second salary offer is a more moderate $42,500. The employee still might reject this more moderate offer; however, the employee is probably more likely to either accept this offer or come back with a counteroffer.

Sequential Information

The game tree (on the next page) illustrates the different stages of the negotiation process, called sequential information. First, the employer chooses its strategy, either low-ball or moderate, and makes the offer to the employee. The employee responds in one of three ways: rejecting the offer and terminating the negotiations; accepting the offer; or making a counteroffer back to the employer. The payoffs for the employer for each of these possible outcomes are calculated by subtracting the amount of the salary from the value of the job to the employer. The payoffs are shown on the right-hand side of the figure.

Expected Payoffs

In the following table, we add the concept of probability to the calculation of the employer’s payoffs. We call these the expected payoffs of the negotiation because they are what we anticipate will actually happen under any circumstance. This table has two sections. The top section assumes the employer adopted a low-ball strategy. The bottom part assumes the employer adopted a more moderate strategy. For each strategy, the payoffs to the employer are multiplied by the probability that they will occur. The total of the payoffs, multiplied by the probability, is the expected payoff to the employer for each strategy.

Expected payoffs take into account the probability of various events. To calculate these probabilities, multiply the value of the outcome by the probability that each outcome will occur. In Figure 1, the payoffs to the employer were based on the amount the employer would have received under any of the scenarios. However, only one of the scenarios will actually occur. The employer needs a way to estimate the effect of making a low-ball or moderate offer before knowing how the employee will react. This can be done by multiplying the amount of each of the possible payoffs by the probability that each one would occur. In Table 1, there are three possibilities for the low-ball strategy. The employer can estimate the probabilities that the employee will choose any one of these three. The total of all the probabilities should equal 100 percent. Then, the payoff for each strategy is multiplied by the probability that it will occur. Add together these three figures and you get the expected payoff from using a low-ball strategy. Do the same thing for the three possible outcomes of the moderate strategy, and you get the expected payoff of using a moderate strategy. In this example, the expected value of using a low-ball strategy is $500 higher than adopting a moderate strategy, so the employer will probably choose the low-ball strategy.

Anchors

Quite often in negotiations, the prices or amounts that the parties state openly to their opponent become anchors. Anchors are figures that are used to make comparisons. We compare a new price to the base or anchor figure to decide if the new figure is better or worse than the anchor. In this illustration, the employer’s initial salary offer can be thought of as an anchor. In responding to the employer’s offer, the employee could decide to make a counteroffer. In this example, the employee’s counteroffer in the first scenario is $45,000 and the employee’s counteroffer in the second scenario is $47,000. The employee might decide how much more to ask for in his or her counteroffer based in part on the amount that the employer initially offered (the anchor). By offering less in the low-ball strategy, the employee’s counteroffer may have been lower. Thus, the employer’s initial offer in the low-ball strategy served as an anchor that pulled down the amount that the employee asked for in his or her counteroffer.

Risk Aversion

Sometimes people are worried, concerned or afraid that something bad will happen. When they have a high level of these types of feelings, they are called risk-averse because they are trying to avoid the risks presented by their options. In this case, if the employer is risk-averse, it would probably choose the moderate strategy because even though the expected payoffs are higher for the low-ball strategy, there is a higher risk under the low-ball strategy (25 percent) that the employee will not accept any offer and the outcome for the employer will be $0. The risk that the employee will turn down the job is only 10 percent in the moderate offer. Thus, the more risk averse the employer, the more likely the employer would be willing to spend more money to make sure that the job candidate gets hired.

High-Ball, Low-Ball

A common negotiating tactic is for one or both parties to make offers or demands that are a long way away from what they expect is reasonable. Negotiators may adopt a high-ball or low-ball strategy just to see how far their negotiating opponent is willing to go in making concessions. Or they might use it to set an anchor that is more favorable to their negotiating position. For example, an employer may state a very low starting salary just to see if the employee might accept it or to reduce the amount that the employee will request in a counteroffer.

Nevertheless, some negotiators will react negatively to what they think is an inappropriately high-ball (or low-ball) offer. They might walk away indignantly or become frustrated by what they believe is a ridiculously unfair offer. If you think your negotiating opponent is using this tactic, it might be helpful to ask him or her to present a more reasonable offer before you continue the negotiation. This can help to frame the range of negotiations closer to your expectations and avoid the setting of anchors that would pull you too far away from your own target point or goals for the negotiations.

Questions

How do you decide what anchors you will use in a negotiation? Do you set your anchors based on what other people are doing? Is this a good idea?

2. When you plan your negotiation strategy, do you consider how your opponent might respond to your offers and demands? If so, do you adjust your positions based on what you expect your opponent will do? Can you anticipate his or her moves?

3. If you open the negotiation with an extremely high or low offer, are you prepared to handle the possibility that your opponent might break off negotiations? If this happens, do you think that if you try to bring your opponent back to the negotiation by making a big concession, it will make you look foolish or uncredible?

4. Some people are more concerned with having a certain outcome. Others might be willing to take a bigger risk in exchange for a bigger payoff. How averse are you to risk? How much are you willing to give to make sure you get what you want?

5. Now that you have more knowledge and experience with negotiations, you are to prepare for a negotiation by generating 1) a list of your must haves at the end of the negotiation, and 2) your opening demands. Pretend that you are either the company management or union leaders (please state which you choose) for employees at a hospital. The issues are shift changes (from 3 – 8 hour shifts to 2 – 12 hour shifts, and the retention or removal of the shift differential), the amount and kinds of raises, health and safety issues, and if you go the union side, they would like more work life benefits and worker appreciation benefits. You can take whatever creative license you want, but keep your starting and ending points relevant to the situation

MAN712 Game Strategies in Negotiation ESSAY

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