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On Bargaining Power
Russell Korobkin*
Editors’ Note: Strip away concepts of power based in your opponent’s relative wealth compared to yours, or based on other popular myths, says Korobkin here. What are you going to do if there is no agreement? What is the other party likely to do? Answer those questions, and you will know who really has how much power in this situation.
This chapter is republished from the same editors’ Negotiator’s Fieldbook (American Bar Assoc. 2006). We appreciate the ABA’s courtesy in agreeing to this republication. Although this chapter was not updated for the NDR, we believe it continues to be a unique and valuable resource. Some formatting has been updated; the text of the chapter and the author’s bio are unaltered.
In an ideal world, all negotiators would have what are sometimes called “common interests.”[1] The old chandelier that to me is clutter in the basement would be an antique to you, and your pleasure in receiving it would be outweighed only by my joy in getting rid of it. In most bargaining situations, however, negotiators’ interests are in conflict. You might like the chandelier more than I do, which makes a mutually advantageous bargain possible, but it is currently lighting my dining room and I would prefer to keep it rather than give it away. You are interested in buying the chandelier from me, but you want to pay a low price. I will consider selling it to you, but I want a high price. In this zero-sum contest, the outcome will most likely depend on the distribution of bargaining power, defined as the ability to convince the other negotiator to give us what we want even when the other would prefer not to do so.
The source of bargaining power is misunderstood by many negotiators, who wrongly assume that the indicia of success in other realms of life are directly related to power at the negotiating table. Wealth, brains, beauty, political connections, prestige, and social influence are nice to have, but none of these items guarantee you the ability to exercise power in any particular negotiation. Bargaining power is situational, not personal. In some labor disputes, unions have more power than management; in others, management has more power than unions. In some merger negotiations, the target company enjoys more power than the suitor; in others, the dynamic is reversed. In some litigation settlement negotiations, the plaintiff has more power than the defendant; in others, the defendant enjoys the advantage. An employee seeking a raise from his boss might enjoy a relative power advantage, or he might not.
In each of these situations, relative bargaining power stems entirely from the negotiator’s ability to, explicitly or implicitly, make a single threat credibly: “I will walk away from the negotiating table without agreeing to a deal if you do not give me what I demand.” The source of the ability to make such a threat, and therefore the source of bargaining power, is the ability to project that he has a desirable alternative to reaching an agreement, often referred to as a “BATNA.”[2] This chapter elaborates on this claim.[3]
BATNA Strength
What you and what your bargaining counterpart will do in case of impasse determines your relative power in the negotiation. In market situations with fungible buyers and sellers, your BATNA is to enter into a similar transaction with someone other than your negotiating counterpart and, thus, your power depends implicitly on the forces of supply and demand. Imagine that you arrive at an automobile dealership hoping to pay “dealer invoice” for the new car of your choice and begin to negotiate with a dealer who hopes to charge the “sticker price.” Your BATNA is to buy an identical car from another dealer, and you have no reason to prefer this dealer over his competitors. The dealer’s BATNA is to wait for the next customer to enter the showroom and attempt to sell the car to that customer. Just as you don’t care from whom you buy the car, the dealer doesn’t care about the identity of the purchaser so long as he pays cash or has good credit.
If the model you have selected is in short supply and all of the other dealers in town have a waiting list of purchasers, your BATNA is relatively weak (you will have to wait for a car and probably pay a premium) and the dealer’s BATNA is relatively strong (he is confident that another customer will be willing to pay the sticker price). In this situation, the dealer enjoys more bargaining power because he can threaten impasse if you do not agree to pay the sticker price. That threat would be credible because, if you refuse to pay that amount, impasse would be in his best interest. In contrast, if all dealers are overstocked and the new year’s models are soon to arrive, you will enjoy a relative power advantage. You can credibly threaten to walk away if the dealer will not agree to a handsome discount, because the chances are good that another dealer, anxious to reduce inventory, would likely agree to a discount. In turn, this means that impasse with this particular dealer would be in your best interest if you do not receive the price that you demand.
Unlike the new car example, many transactions involve goods or services that are somewhat unique, such that they create a degree of bilateral monopoly: that is, ….
For full contents please purchase The Negotiator’s Desk Reference.
Endnotes
*(from The Negotiator’s Fieldbook, ABA 2006) Russell Korobkin is professor of law at the University of California, Los Angeles (UCLA), where he teaches Negotiation and Mediation, Contracts, and Health Care Law. He also conducts negotiation training workshops for lawyers and provides mediation services. Professor Korobkin is the author of the textbook Negotiation Theory and Strategy (Aspen Law & Business, 2002), as well as more than 30 scholarly articles on negotiating in the transactional and dispute resolution contexts and other topics that combine law, economics, and psychology. Before entering law teaching, he received his B.A. and J.D. degrees from Stanford University, clerked for the Honorable James L. Buckley of the U.S. Court of Appeals for the District of Columbia Circuit, and worked as an associate at the law firm of Covington and Burling in Washington, D.C.
[1] See, e.g., David A. Lax & James K. Sebenius, The Manager as Negotiator (1986).
[2] See Roger Fisher, et al., Getting to Yes 100 (2d ed. 1991) (coining the well-known acronym, short for “Best Alternative to a Negotiated Agreement”).
[3] For a more elaborate treatment of this subject, see Russell Korobkin, Negotiation Theory and Strategy 149-82 (2002).
This chapter is republished from the same editors’ Negotiator’s Fieldbook (American Bar Assoc. 2006). We appreciate the ABA’s courtesy in agreeing to this republication. Although this chapter was not updated for the NDR, we believe it continues to be a unique and valuable resource. Some formatting has been updated; the text of the chapter and the author’s bio are unaltered.
In an ideal world, all negotiators would have what are sometimes called “common interests.”[1] The old chandelier that to me is clutter in the basement would be an antique to you, and your pleasure in receiving it would be outweighed only by my joy in getting rid of it. In most bargaining situations, however, negotiators’ interests are in conflict. You might like the chandelier more than I do, which makes a mutually advantageous bargain possible, but it is currently lighting my dining room and I would prefer to keep it rather than give it away. You are interested in buying the chandelier from me, but you want to pay a low price. I will consider selling it to you, but I want a high price. In this zero-sum contest, the outcome will most likely depend on the distribution of bargaining power, defined as the ability to convince the other negotiator to give us what we want even when the other would prefer not to do so.
The source of bargaining power is misunderstood by many negotiators, who wrongly assume that the indicia of success in other realms of life are directly related to power at the negotiating table. Wealth, brains, beauty, political connections, prestige, and social influence are nice to have, but none of these items guarantee you the ability to exercise power in any particular negotiation. Bargaining power is situational, not personal. In some labor disputes, unions have more power than management; in others, management has more power than unions. In some merger negotiations, the target company enjoys more power than the suitor; in others, the dynamic is reversed. In some litigation settlement negotiations, the plaintiff has more power than the defendant; in others, the defendant enjoys the advantage. An employee seeking a raise from his boss might enjoy a relative power advantage, or he might not.
In each of these situations, relative bargaining power stems entirely from the negotiator’s ability to, explicitly or implicitly, make a single threat credibly: “I will walk away from the negotiating table without agreeing to a deal if you do not give me what I demand.” The source of the ability to make such a threat, and therefore the source of bargaining power, is the ability to project that he has a desirable alternative to reaching an agreement, often referred to as a “BATNA.”[2] This chapter elaborates on this claim.[3]
BATNA Strength
What you and what your bargaining counterpart will do in case of impasse determines your relative power in the negotiation. In market situations with fungible buyers and sellers, your BATNA is to enter into a similar transaction with someone other than your negotiating counterpart and, thus, your power depends implicitly on the forces of supply and demand. Imagine that you arrive at an automobile dealership hoping to pay “dealer invoice” for the new car of your choice and begin to negotiate with a dealer who hopes to charge the “sticker price.” Your BATNA is to buy an identical car from another dealer, and you have no reason to prefer this dealer over his competitors. The dealer’s BATNA is to wait for the next customer to enter the showroom and attempt to sell the car to that customer. Just as you don’t care from whom you buy the car, the dealer doesn’t care about the identity of the purchaser so long as he pays cash or has good credit.
If the model you have selected is in short supply and all of the other dealers in town have a waiting list of purchasers, your BATNA is relatively weak (you will have to wait for a car and probably pay a premium) and the dealer’s BATNA is relatively strong (he is confident that another customer will be willing to pay the sticker price). In this situation, the dealer enjoys more bargaining power because he can threaten impasse if you do not agree to pay the sticker price. That threat would be credible because, if you refuse to pay that amount, impasse would be in his best interest. In contrast, if all dealers are overstocked and the new year’s models are soon to arrive, you will enjoy a relative power advantage. You can credibly threaten to walk away if the dealer will not agree to a handsome discount, because the chances are good that another dealer, anxious to reduce inventory, would likely agree to a discount. In turn, this means that impasse with this particular dealer would be in your best interest if you do not receive the price that you demand.
Unlike the new car example, many transactions involve goods or services that are somewhat unique, such that they create a degree of bilateral monopoly: that is, ….
For full contents please purchase The Negotiator’s Desk Reference.
Endnotes
*(from The Negotiator’s Fieldbook, ABA 2006) Russell Korobkin is professor of law at the University of California, Los Angeles (UCLA), where he teaches Negotiation and Mediation, Contracts, and Health Care Law. He also conducts negotiation training workshops for lawyers and provides mediation services. Professor Korobkin is the author of the textbook Negotiation Theory and Strategy (Aspen Law & Business, 2002), as well as more than 30 scholarly articles on negotiating in the transactional and dispute resolution contexts and other topics that combine law, economics, and psychology. Before entering law teaching, he received his B.A. and J.D. degrees from Stanford University, clerked for the Honorable James L. Buckley of the U.S. Court of Appeals for the District of Columbia Circuit, and worked as an associate at the law firm of Covington and Burling in Washington, D.C.
[1] See, e.g., David A. Lax & James K. Sebenius, The Manager as Negotiator (1986).
[2] See Roger Fisher, et al., Getting to Yes 100 (2d ed. 1991) (coining the well-known acronym, short for “Best Alternative to a Negotiated Agreement”).
[3] For a more elaborate treatment of this subject, see Russell Korobkin, Negotiation Theory and Strategy 149-82 (2002).