Business System Analysis

1
Business System Analysis Decision Making-
Lecture 11

• Zhangxi Lin
• ISQS 5340
• July 2006

2
Chapter 9 Making Rational Decisions in
Negotiations

• Outline of the chapter
• A Decision-Analytic Approach to Negotiations
• Claiming Value in Negotiation
• Creating Value in Negotiation
• An Extended Example The Case of El-Tek
• Integration and Critique

3
A Decision-Analytic Approach to Negotiations

• Raiffas decision-analytic approach to
  negotiations (1982 2001). Three key sets of
  information determine the structure of the
  negotiation game
• Each partys alternative to a negotiated
  agreement Best alternative To a Negotiated
  Agreement (BATNA)
• Each partys set of interests
• The relative importance of each partys interests
• Again think about the splitting 5000 game. If
  both Mark and you are rational and negotiation is
  allowed, what are the possible outcomes?
• What is the range of your preference?
• What is the possibly acceptable split that Mark
  will likely to accept?

4
Claiming Value in Negotiation
Bargaining Zone
5000
2500
1000
100
Mark
You
A resolvable scenario
5
Claiming Value in Negotiation
No Bargaining Zone
5000
2500
1000
100
Mark
You
A non-resolvable scenario
6
Creating Value in Negotiation

• The case of the Sinai Peninsula negotiation
  between Egypt and Israel (p138)
• Intuitive behind the facial issue there are some
  interests for negotiating parties. The purpose of
  solving the issue is to benefit both sides
  interests. If these interests can be identified,
  it is possible to find a better way to reach the
  agreement without worrying too much about the
  difficult issue.

7
Creating Value in Negotiation
A
Desired point But how to reach it?
?
D
?
Utility to Egypt
C
?
?
B
Utility to Israel
8
An Extended Example The Case of El-Tek

• The case of El-Tek
• Selling Z-25 to whom? AD vs. MD
• ADs concern Losing market competitive advantage
  if the material is sold to a rival company

Bargaining Zone
10 million
5 million
12 million
2 million
MD
AD
9
An Extended Example The Case of El-Tek

• Three underlying issues
• Transfer price
• ADs competitor protection
• El-Teks competitor protection
• El-Teks benefit ADs benefit MDs benefit
• Reality without careful coordination and
  systematical value creating, El-Teks benefit may
  not be optimized.
• Need to adopt the effective techniques to avoid
  stalled negotiation caused by needless arguments
  over conflicting predictions about uncertain
  future.

10
An Extended Example The Case of El-Tek

• Claiming value
• Creating value by identifying additional issues
• Creating value through bets
• Avoid overvaluing
• Ways in which contingent contracts cam improve
  the outcomes
• Bets build on differences to joint value
• Bets help manage biases
• Bets diagnose disingenuous parties
• Bets establish incentives for contractual
  performance
• Using risk, temporal, and other differences to
  create value
• Gathering information to create value in
  negotiation
• Build trust and share information
• Ask questions
• Strategically disclose information
• Make multiple offers simultaneously
• Search for post-settlement settlements

11
Negotiation with Multiple Criteria

• Pareto Efficiency and Pareto Frontier
• An example of negotiation with the exchange of
  two goods.

12
Pareto efficiency

• Pareto efficiency, or Pareto optimality, is an
  important notion in neoclassical economics with
  broad applications in game theory, engineering
  and the social sciences.
• Given a set of alternative allocations and a set
  of individuals, a movement from one allocation to
  another that can make at least one individual
  better off, without making any other individual
  worse off, is called a Pareto improvement or
  Pareto optimization.
• An allocation of resources is Pareto efficient or
  Pareto optimal when no further Pareto
  improvements can be made.
• For a given system, the Pareto Frontier is the
  set of parameterizations (allocations) that are
  all Pareto efficient. Finding Pareto Frontiers is
  particularly useful in engineering.

13
The Exchange of Beer vs. Bread

• Alice has a half dozen bottles of beer (1 each
  bottle) and Bob possesses 6 loaves of bread (0.8
  dollar each). Alice wants some bread and Bob
  wants some bear. They exchange their possessions.
• How will this be done?

14
Bread
x2
Agent 1s Indifferent curve with regard to x1
and x2
x1
Beer
Alice
15
Beer
Bob
(0, 6)
(3, 3)
Agent 2s Indifferent curve of x1 and x2
Bread
16
An Edgeworth Box Diagram
Bread
Bob
Beer
Beer
Alice
Bread