Bargaining failures
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This presentation describes several bargaining failures during a negotiation process and how to solve them depending on particular strategies: backward induction, outside options, simultaneous bargaining over many issues and brinkmanship and strikes.
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Bargaining failures
- 2. Agenda Introduction Backward induction Bargaining failures Brinkmanship and strikes Solutions for bargaining failures
- 3. Introduction
- 4. Backward induction 1011009998 The Union proposes first Union 0 1000 0 $1000 Management 1000 0 1000 0 Compromise: Each side gets $500 per day.
- 5. Successive rounds of wage bargaining Union’s share Management Days to go offer by Total ($) Per day ($) Total ($) Per day ($) 1 Union 1000 1000 0 0 2 Management 1000 500 1000 500 3 Union 2000 667 1000 333 4 Management 2000 500 2000 500 5 Union 3000 600 2000 400 … 100 Management 50000 500 50000 500 101 Union 51000 505 50000 495
- 6. The Handicap system in negotiation: outside options Union’s share Management Days to go offer by Total ($) Per day ($) Total ($) Per day ($) 1 Union 1000 1000 0 0 2 Management 1300 650 700 350 3 Union 2300 767 700 233 4 Management 2600 650 1400 350 5 Union 3600 720 1400 280 … 100 Management 65000 650 35000 350 101 Union 66000 653 35000 347 Suppose that the members of the union can earn $300 a day in outside activities while negotiations with the hotel management go on. The better a party cn do by itself in the absence of an agreement, the higher will be its share of the pie that is the subject of bargaining.
- 7. The Handicap system in negotiation: outside options Outside options Remaining amount to be shared Share per day Union $300 (1000-500-300) = 200 300+ (1000-800) /2= 400 Management $500 500 +(1000- 800)/2 = 600 A bigger outside option leads to a bigger final outcome.
- 8. This will hurt you more than it hurts me The process of « hurting » the other’s outside option could lead to improve the outcome of the hurting party Outside options Remaining amount to be shared Share per day Union $200 (300- 100) (1000-200-300) = 500 200+ (1000- 500) /2= 450 Management $300 (500- 200) 300 +(1000- 500)/2 = 550 Suppose the Union gives up $100 a day from outside income to intensify its picketing The union’s threat of hurting both (but hurting the management more) has earned it an extra $50.
- 9. Simultaneous bargaining over many issues Many dimensions to bargaining Exploit the difference in the relative valuations to achieve outcomes that are better for everyone Joining issues together opens up the possibility of using one bargaining game to generate threats in another
- 11. I hope his cost of waiting is bigger than mine!
- 12. Each party tries to guess…
- 14. Divide the period over which to bargain
- 16. Thank you!
Editor's Notes
- If it’s 100 the first one is not the last one and wiill begin the backward induction
- When 100 they will be even. Better to give than receive
- Each time the union makes an offer, it has an advantage, which stems from its ability to make the last all-or-nothing offer. But the advantage gets smaller as the number of rounds increases. At the start of a season 101 days long, the two sides’ positions are almost identical: $505 versus $495. Almost the same division would emerge if the management were to make the last offer, or indeed if there were no rigid rules like one offer a day, alternating offers, etc. They become innocuous when the time between offers is short and the bargaining horizon is long—in these cases, looking ahead and reasoning backward leads to a very simple and appealing rule: split the total down the middle.
- Taking employee vs management negotiation simulation. Complicated to evaluate the wage of each option in the negotiation.