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Negotiations
• Two parties need to reach a joint decision
but have different preferences.
• They negotiate.
• Eventually they achieve a mutually
agreeable outcome.
Two-party negotiations
• Game Theory: given absolute rationality, it
provides the most precise prescriptive
advice available to the negotiator.
• However:
– It relies on a complete description of all
options and outcomes. This may be infinitely
complex.
– It requires that all players consistently act
rationally.
Decision-analytic approach
• One must assess three key issues:
• Claiming value: People think hard about the offers but neglect
their min/max points (BATNAs). AD can make $5 million
anyway. MD can make $4 million without Z-25. MD is
indifferent b/n no deal and paying $10 million (of the $14
million).
• Any agreement b/n $5 million and $10 million will lead to a
joint surplus of $5 million to El-Tek. With no deal AD earns $5
million, MD earns $4 million, a total of $9 million. With a
successful deal, both AD and MD have $14 million to divide.