integrative bargaining

Bargaining

[bahr-guhn]

Bargaining or haggling is a type of negotiation in which the buyer and seller of a good or service dispute the price which will be paid and the exact nature of the transaction that will take place, and eventually come to an agreement. Bargaining is an alternative pricing strategy to fixed prices.

Bargaining is also the 3rd stage of the Kübler-Ross model (commonly known as the stages of dying).

Dickering refers to the same process, albeit with a slight negative (petty) connotation.

Contexts Where Bargaining is Allowed

Not all transactions are open to bargaining. Both religious beliefs and regional custom may determine whether or not the seller is willing to bargain.

Regional differences

In North America and Europe bargaining is restricted to expensive or one-of-a-kind items (automobiles, jewellery, art, real estate, trade sales of businesses) and informal sales settings such as flea markets and garage sales. In other regions of the world bargaining may be the norm even for small commercial transactions.

In almost all large complex business negotiations, a certain amount of bargaining takes place. One simplified 'western' way to decide when it's time to bargain is to break negotiation into 2 stages: creating value and claiming value. Claiming value is another phrase for bargaining. Many cultures take offence when they perceive the other side as having started bargaining too soon. This offence is usually as a result of their wanting to first create value for longer before they bargain together. The Chinese culture by contrast places a much higher value on taking time to build a business relationship before starting to create value or bargain. Not understanding when to start bargaining has ruined many a otherwise positive business negotiation.

In areas where bargaining at the retail level is common, the option to bargain often depends on the presence of the store's owner. A chain store managed by clerks is more likely to use fixed pricing than an independent store managed by an owner or one of owner's trusted employees.

The store's ambiance may also be used to signal whether or not bargaining is appropriate. For instance, a comfortable and air-conditioned store with posted prices usually do not allow bargaining, but a stall in a bazaar or marketplace may. Supermarkets and other chain stores almost never allow bargaining. However, the importance of ambiance may depend on the cultural commitment to bargaining. In Israel, prices on day-to-day items (clothing, toiletries) may be negotiable even in a Western style store manned by a clerk.

In India, a sign posted with the phrase fixed price indicates that bargaining is not allowed, although quite often this is not the case.

Religious differences

Quakers require fixed price contracts.

Traditionally, Jews had a limit on the allowable profit margin. Limits were also placed on renegotiations of a price for services.

Theories

Behavioral theory

The personality theory in bargaining emphasizes that the type of personalities determine the bargaining process and its outcome. A popular behavioral theory deals with a distinction between hard-liners and soft-liners. Various research papers refer to hard-liners as warriors, while soft-liners are shopkeepers.

Game theory

Bargaining games refer to situations where two or more players must reach agreement regarding how to distribute an object or monetary amount. Each player prefers to reach an agreement in these games, rather than abstain from doing so; however, each prefers that agreement which most favours his interests. Examples of such situations would be the bargaining involved in a labour union and the directors of a company negotiating wage increases, the dispute between two communities about the distribution of a common territory or the conditions under which two countries can start a programme of nuclear disarmament. Analyzing these kinds of problem looks for a solution specifying which component in dispute will correspond to each party involved. Players in a bargaining problem can bargain for the objective as a whole at a precise moment in time. The problem can also be divided so that parts of the whole objective become subject to bargaining during different stages.

In a classical bargaining problem the result is an agreement reached between all interested parties, or the status quo of the problem. It is clear that studying how individual parties make their decisions is insufficient for predicting what agreement will be reached. However, classical bargaining theory assumes that each participant in a bargaining process will choose between possible agreements, following the conduct predicted by the rational choice model. It is particularly assumed that each player's preferences regarding the possible agreements can be represented by a von Neumann-Morgenstern utility function.

Nash [1950] defines a classical bargaining problem as being a set of joint allocations of utility, some of which will correspond to that the players would obtain if they reach an agreement, and another which represents what they would get if they failed to do so.

A bargaining game for two players is defined as a pair (F,d) where F is the set of possible joint utility allocations (possible agreements), and d is the disagreement point.

For the definition of a specific bargaining solution is usual to follow Nash's proposal, setting out the axioms this solution should satisfy. Some of the most frequent axioms used in the building of bargaining solutions are efficiency, symmetry, independence of irrelevant alternatives, scalar invariance, monotonicity, etc.

The Nash bargaining solution is the bargaining solution which maximizes the product of agent's utilities on the bargaining set.

The Nash bargaining solution, however, only deals with the simplest structure of bargaining. It is not dynamic (failing to deal with how pareto outcomes are achieved). Instead for situations where the structure of the bargaining game is important, a more mainstream game theoretic approach is useful. This can allow players preferences over time and risk to be incorporated into the solution of bargaining games. It can also show how the detail can matter. For example the Nash bargaining solution for Prisoners' Dilemma is different from the Nash equilibrium.

Processual theory

This theory isolates distinctive elements of the bargaining chronology in order to better understand the complexity of the negotiating process. Several key features of the processual theory include:

Bargaining range
Critical risk
Security point
Toughness dilemma

Integrative theory

Integrative bargaining (also called "interest-based bargaining," "win-win bargaining") is a negotiation strategy in which parties collaborate to find a "win-win" solution to their dispute. This strategy focuses on developing mutually beneficial agreements based on the interests of the disputants. Interests include the needs, desires, concerns, and fears important to each side. They are the underlying reasons why people become involved in a conflict.

"Integrative refers to the potential for the parties' interests to be [combined] in ways that create joint value or enlarge the pie."[1] Potential for integration only exists when there are multiple issues involved in the negotiation. This is because the parties must be able to make trade-offs across issues in order for both sides to be satisfied with the outcome.

Narrative theory

A very different approach to conceptualizing bargaining is as co-construction of a social narrative, where narrative, rather than economic logic drives the outcome.

Automated bargaining

When a bargaining situation is complex, finding Nash equilibrium will be difficult using game theory. Evolutionary computation methods have been designed for automated bargaining, and demonstrated efficient and effective for approximating Nash equilibrium (e.g. see Automated Bargaining project at University of Essex).

References

An explanation of the narrative theory of bargaining