Deck 15: Bargaining and Negotiation

Question 1

Total trading gains available in a negotiation are high if:

A) the trading parties have strong negotiating skills.
B) the traded commodity has a large number of substitutes.
C) the traded commodity has multiple uses.
D) the seller's value is significantly lower than the buyer's value.
E) the final price of the traded commodity exceeds the buyer's walk-away price.

Answer 1

D

Question 2

Under imperfect information, bargainers:

A) may miss some efficient agreements due to self-interested strategic behavior.
B) can never reach an efficient agreement.
C) typically have sufficient incentives to fulfill the terms of the agreement.
D) will have an interest in revealing their true values at the outset of negotiations.
E) typically start with moderate and compatible demands.

Answer 2

A

Question 3

The prospect for a mutually beneficial out-of-court settlement is affected by all of the following except:

A) the disputants' litigation costs.
B) differences in probability assessments of the two firms.
C) the expected value of litigation for the plaintiff.
D) legal costs incurred prior to beginning the settlement talks.
E) the expected value of litigation for the defendant.

Answer 3

D

Question 4

If the expected litigation value for each firm for a case is $275,000 and the court costs for the firms are $55,000 and $30,000 respectively, then the size of the zone of a mutually beneficial agreement is:

A) $220,000.
B) $85,000.
C) $25,000.
D) $75,000.
E) $245,000.

Question 5

The expected value of litigation for both firms A and B both is $500,000 in favor of Firm A. The court costs for A and B are $60,000 and $100,000, respectively. Calculate the collective benefit that can be obtained if both firms agree to an out-of-court settlement.

A) $200,000
B) $160,000
C) $500,000
D) $40,000
E) $60,000

Question 6

If both parties have perfect information about all economic facts of the negotiation:

A) the parties should reach an efficient agreement.
B) the parties are sure to reach an equitable agreement.
C) any mutually-beneficial profit split can be supported as an efficient outcome.
D) a 50-50 profit split is the sole equilibrium outcome.
E) a price offered by one party is most likely to fall beyond the zone of agreement.

Question 7

An out-of-court settlement in a dispute is mutually beneficial if the:

A) difference between the parties' court costs is greater than the difference between their expected values from litigation.
B) sum of the parties' court costs is smaller than the difference between their expected values from litigation.
C) sum of the parties' court costs is greater than the difference between their expected values from litigation.
D) sum of the parties' court costs is greater than the sum of their expected values from litigation.
E) difference between the parties' court costs is smaller than the difference between their expected values from litigation.

Question 8

Given buyer and seller walk-away prices of $40,000 and $60,000, respectively:

A) the buyer can enjoy a maximum surplus of $10,000.
B) the seller can earn a maximum profit of $10,000.
C) the size of the zone of agreement is $20,000.
D) a zone of agreement does not exist.
E) the size of the zone of agreement is $100,000.

Question 9

The size of the zone of agreement measures:

A) the difference between the buyer's marginal benefit and the price.
B) the average of the trading parties' walk-away prices.
C) the difference between the seller's marginal cost and the price.
D) the difference between the buyer's and seller's walk-away values.
E) the excess of producer's surplus over consumer's surplus.

Question 10

An efficient quantity-price agreement is achieved by:

A) finding a point of tangency between buyer and seller profit contours.
B) supplying the maximum quantity that the buyer demands.
C) finding the buyer's value-maximizing quantity.
D) minimizing the supplier's average cost per unit.
E) finding a point where the seller's marginal cost is equal to zero.

Question 11

The outcome of a negotiated agreement is deemed efficient only if:

A) neither the buyer nor the seller receives more than 60% of the total surplus.
B) the sum of the buyer's and seller's profit shares is less than 100%.
C) the agreement equitably balances both sides' interests.
D) both parties benefit from the agreement (relative to their walk-away options).
E) no other agreement makes one party better off without making the other worse off.

Question 12

When each party makes a single offer to divide profits, an equilibrium is reached only if:

A) the individual profits add up to less than 100% of the total profit.
B) each party gets an equal share.
C) the individual profits add up to more than 100% of the total profit.
D) the sum of the individual profits is equal to the total profit.
E) an increase in share of a party does not reduce the share of the other party.

Question 13

The _____ is the upper boundary showing the combinations of buyer's profit and seller's profit at all possible prices within the zone of agreement.

A) profit contour
B) payoff frontier
C) profit curve
D) contract curve
E) marginal benefit curve

Question 14

In a distributive bargain:

A) the parties negotiate over the share of total profit.
B) total profits are distributed equally among the participating parties.
C) the individual profits of the trading parties are maximized.
D) the disputants are engaged in a zero-sum negotiation.
E) equity is the main concern rather than efficiency.

Question 15

The minimum price that a seller is willing to accept for his product and the maximum price a buyer is willing to pay for the product are referred to as their:

A) bid prices.
B) reservation prices.
C) offer prices.
D) aspiration prices.
E) take it or leave it offers.

Question 16

An agent is said to be risk averse only if he assesses:

A) an outcome's certainty equivalent to be greater than its expected value.
B) the expected value of an outcome to be negative.
C) an outcome's expected value to be equal to its certainty equivalent.
D) an outcome's certainty equivalent to be less than its expected value.
E) an outcome's certainty equivalent to be negative

Question 17

In multiple-issue negotiations where monetary compensation is available:

A) there is less opportunity for mutual gain than when a single issue is at stake.
B) a new issue should be adopted only if the benefit to one side exceeds the cost to the other.
C) a new issue should be adopted only if both sides directly benefit.
D) a new issue should be adopted if it increases the benefit to any one of the parties, even at the expense of the other.
E) efficiency cannot be attained by merely increasing the total value the parties derive from the negotiation.

Question 18

The optimal response to an uncertain negotiation is risk sharing if:

A) both parties are risk lovers.
B) both parties are risk averse.
C) one party is risk averse and the other is risk neutral.
D) one party is a risk lover and the other is risk neutral.
E) both parties are risk neutral.

Question 19

The total net benefit from a quantity-price contract is maximum when:

A) the marginal benefit to the buyer exceeds the seller's marginal cost.
B) the seller's marginal cost exceeds the buyer's marginal benefit.
C) the marginal benefit to the buyer is at its maximum.
D) the marginal cost to the seller is at its minimum.
E) the marginal benefit to the buyer equals the seller's marginal cost.

Question 20

Contractor A is negotiating to build a warehouse for Firm B to be completed in 75 days. Contractor A's estimated cost is $200,000. Pushing back the completion date by 15 days would allow it to reduce its cost by $30,000. The value to Firm B of the warehouse is $250,000 if completed in 75 days and $235,000 if completed in 90 days. A mutually beneficial, efficient deal:

A) means completion of the warehouse construction in 90 days at a price greater than $235,000.
B) means completion of the warehouse construction in 90 days at a price between $170,000 and $235,000.
C) is not possible as there is no zone of agreement.
D) means completion of the warehouse construction in 75 days at a price between $200,000 and $250,000.
E) is possible only if contractor A agrees to build the warehouse in 75 days.

Question 21

What factors are responsible for buyers and sellers holding different walk-away prices?

Question 22

A movie producer is negotiating with an up-coming director to direct its next summer action film. The director's latest movie has been well-received and there is talk that he might be nominated for an academy award. The producer believes the director is currently worth a $500,000 fee but would be worth a $2 million fee if he is nominated for an Oscar (these are the producer's reservation prices). For his part, the director's current walk-away price is $300,000 but it would rise to $1.5 million with an Oscar nomination. The producer thinks the chance of a nomination is 0.3; the director thinks it is 0.6.
(a) Can the parties agree on a flat dollar fee? If so, what is the zone of agreement?

Question 23

Frequently, bargaining impasses lead to prolonged and costly strikes. If we assume that the negotiators are rational decision makers, how can this occur?

Question 24

The expected value of litigation for both firms A and B both is $300,000 in favor of Firm A. The court costs for A and B are $50,000 and $75,000, respectively.
(a) Determine the range of out-of-court settlements for Firms A and B.

Question 25

In recent years, the U.S. government has often negotiated cost-plus contracts (CPC) with defense firms developing new weapons systems. Under a CPC, the government reimburses the contractor for the total costs it incurs. Frequently, the result is cost overruns in development. Why might this occur? How might an alternative contract structure remedy this problem? Could this contract solution cause a new problem?

Question 26

Discuss the differences between one-shot bargaining situations and repeated situations. Will the situations produce different bargaining strategies? Explain why or why not.

Question 27

Delays and failure to reach an agreement are often viewed as inefficient, based on irrational behavior, or mistakes. Is this always the case? Explain why or why not.

Question 28

In each case, determine the total possible trading gain (i.e., the sum of the agents' profits).
(a) The seller's and buyer's reservation prices are $275,000 and $375,000, respectively.

Question 29

Describe factors that might cause bargainers to fail to reach efficient agreements.

Question 30

A would-be acquirer is preparing to make a first-and-final tender offer to acquire target Company T. The acquirer judges that Company T's reservation value is somewhere between $60 and $90 per share, with all values in between equally likely. Under its own management, the acquirer predicts that the target will be worth $100 per share. Should the firm offer $90 per share to assure that Company T will sell out? Determine the offer that maximizes the acquirer's expected profit.

Question 31

Why might legislators often end up reversing their political position on an issue by voting in favor of a bill when previously they had spoken out against it?

Question 32

At her current per-day consulting fee, a freelance marketing consultant finds herself with as many jobs as she can handle. In fact, over the past six months, she has been hired by nine of the ten clients who have made queries about her services. At her current consulting fee, she finds herself indifferent between "taking or leaving" the extra work. Evaluate the consultant's pricing strategy.

Question 33

How do bargaining strategies differ between multiple-issue negotiations and single-issue negotiations?

Question 34

Briefly summarize how bargaining can be simultaneously cooperative and competitive.

Question 35

What determines whether or not a company will settle out of court when sued for a faulty product? How might the company react differently if other agents might sue it in the future? Explain.

Question 36

How do differences in probability assessments cause firms to assess different values for a transaction?

Question 37

Suppose four identical, risk-averse individuals form a partnership to share equally the profit or loss from an investment.
(a) What is the effect on each individual's expected profit and certainty equivalent (CE)?

Question 38

Determine the value-maximizing order quantity when the buyer's total value from purchasing Q units of output is B = 30Q - Q2‚ and the seller's cost of producing Q units is C = .5Q2.

Question 39

In repeated negotiations between two firms:

A) the bargaining behavior of the firms is motivated solely by the immediate profit available from an agreement.
B) the reputation of a firm does not play a significant role.
C) there is enhanced scope for purely opportunistic behavior by firms.
D) The firm with less bargaining power is positioned to receive a greater share of the profit.
E) firms have extra incentives to maintain a cooperative relationship.

Question 40

A faulty gasket on a piece of machinery supplied by Firm Z caused a fluid leak that damaged equipment in Factory X. Determine the range of out-of-court settlements when the expected value of litigation for the two firms is $65,000 in favor of Factory X. The court costs for Firm Z are $20,000; the costs for Factory X are $25,000.

Question 41

Some years ago, Time Warner (TW) and Disney were engaged in lengthy negotiations to strike a deal so that TW's cable television service would continue to carry Disney programming and Disney's ABC network channels. Without an agreement, TW would lose ABC and Disney shows in 3.5 million homes across seven major markets. Disney was demanding as much as $300 million from TW for the right to carry the channels. It also wanted TW to feature its new channels (including Toon Disney) and for TW to make the Disney channel part of its basic cable package. If its demands were not met, Disney threatened to pull its programming immediately, during the crucial ratings sweeps period when audience levels are measured and future advertising rates are set. Losing ABC and Disney would anger TW's cable customers who might decide to switch to rival satellite television to get the channels. TW wanted the current agreement extended for six months, by which time the AOL Time Warner merger would be completed (securing the company's position as a multimedia giant).
(a) Describe the relevant factors that would influence the "balance of power" in the negotiation between Disney and TW. Is each side's negotiation strategy utilizing what power it has? Explain briefly.