Negociation: Negotiation and Reservation Price

Topics: Negotiation, Game theory, Economic efficiency Pages: 13 (1937 words) Published: September 24, 2014
Anna Hardy - Lucie Lambert - Manon Lauzet - Thomas Jouvel - Chloé Gilles

EXERCICE IN NEGOCIATION ANALYSIS

EXERCISE ON BATNAS, RESERVATION PRICES, AND ZOPAS

A PRIMER ON BATNAS, RESERVATION PRICES, AND ZOPAS

This introduction talks about Negotiation concepts. BATNA (Best Alternative to Negotiated Agreement) is the last proposal that a person can do before exiting the negotiation. You have to prepare your BATNA before the negotiation to keep in mind what is your alternative solution if the agreement cannot be reach.

Then, RESERVATION PRICES is the point beyond which a negotiator is ready to walk away from a negotiated agreement. In a negotiation you are indifferent between settling at your reservation prices or BATNA. The reservation prices is a threshold that both sides establish a maximum for the buyer (BRP) and a minimum for the seller (SRP). As a consequence, if SRP > BRP you cannot reach an agreement. Finally, ZOPA (Zone Of Possible Agreement) is the interval between the SRP and the BRP.

Exercise 1 :

_Jewel's equipment is a manufacturer of magnetic card readers for medical application. Now they are negotiating with their possible suppliers of CPU (central processing unit). They propose two types of CPU: Z-1 and Z-2. Z-1 working slightly better than Z-2. The estimate benefit of Z-1 over Z-2 is about $5/unit._

_There are three main suppliers:_

_Acme, that sells Z-2 CPU at $35/unit._

_Beta, that sells Z-1 CPU at $38/unit._

_Condor, which negotiation has not begun yet, is selling Z-2 CPU._

A. IN NEGOTIATION WITH CONDOR, WHAT IS JEWEL'S BATNA?

We know that Acme has offered to sell Jewel Z-2 CPUs (central processing unit) at $35/units. But we have to add $5/unit to Z-2 because the benefit of Z-1 over Z-2 is about $5/unit. So,

35+5=40>38 (price of Z-1)

JOWEL'S BATNA IS TO BUY Z-1 CPUS FROM BETA.

B. IN NEGOTIATING WITH CONDOR, WHAT IS JEWEL'S RESERVATION PRICE (I.E., THE MOST IT WILL PAY FOR CONDOR'S Z-2 CPU? )

According their preference for Z-1 at $38/unit and the difference of benefit ($5/unit), the most they will pay for Condor Z-2 CPU would be,

38-5=33

SO JEWEL'S RESERVATION PRICE FOR CONDOR'S Z-2 CPU IS $33/UNIT.

_Our purchasing manager think that there is a 50% chance to reach a 20% reduction from Acme (Z-2 CPU at $28/unit)._

C. HOW HAS JEWEL'S BATNA CHANGED?

If the purchasing manager obtains 20% reduction, JEWEL'S BATNA WILL CHANGE TO $28/UNIT OF Z-2 FROM ACME AND IF WE CANNOT REACH AN AGREEMENT, THE ALTERNATIVE SOLUTION WOULD BE $38/UNIT FOR Z-1 CPU FROM BETA.

D. WHAT IS JEWEL'S NEW RESERVATION PRICE, I.E., THE MOST IT WILL PAY FOR CONDOR'S Z-2 CPU? ASSUME THAT JEWEL MAKES DECISIONS ON THE BASIS OF EXPECTED MONETARY VALUE (EMV).

EMV is a figure that shows how much money a plaintiff can reasonably expect in mediation (average of the best and worst-case scenarios).

RP= (probability*dollar values n°1) + (probability*dollar value n°2)

RP= (0.5*28) + (0.5*33) =30.5

THE NEW JEWEL'S RESERVATION PRICE FOR CONDOR'S Z-2 CPU IS $30.5/UNIT.

_Condor's largest customer recently declared bankruptcy so Condor has an excess of Z-2 CPU. If Condor is enable to sell it to Jewel, they estimate there is a 20% chance that they will sell it at $30/unit to one of Jewel's competitors and a 80% chance that they will have to liquidate their stock of $10/unit._

E. WHAT IS CONDOR'S BATNA?

Condor's BATNA is now is to SELL THE CPU TO JEWEL'S COMPETITORS FOR $30/UNIT IF IT'S POSSIBLE. OTHERWISE, THEY HAVE TO LIQUIDATE THEIR STOCK FOR $15/UNIT.

F. WHAT IS CONDOR'S RESERVATION PRICE? ASSUME THAT CONDOR MAKES DECISIONS ON THE BASIS OF EMV.

RP= (0.2*30) + (0.8*15) =18

THE NEW CONDOR'S RESERVATION PRICE IS $18/UNIT.

G. ASSUMING JEWEL'S RESERVATION PRICE FROM QUESTION 1D, WHAT IS THE ZONE OF POSSIBLE AGREEMENT?

$30.5/unit Jewel's reservation price $ 18 /unit Condor's reservation price

BRP SRP

ZOPA $12.5/unit

SO THE JEWEL'S ZOPA IS $12.5/UNIT OF...
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