Week 3 -- Bilateral Negotiation

This week's concepts are pretty easy... there aren't any!

Just kidding. There's one: Bilateral Negotiation.

All this means is that two people (or parties, etc.) are doing business with each other. So if you go to your friend and sell him or her your textbook, this would be what we’re calling a bilateral negotiation; you’d have a WTS (your bare minimum to sell), and he or she would have a WTP, which would be the highest amount he’d pay (generally the cost of a new textbook, if it were his best alternative... we’ll get to this later).

Easy, right? Let’s keep going.

There are a few assumptions, which make some amount of sense;

1) We’re assuming the two people want to maximize the total happiness of the group (efficiency).

2) We’re assuming that people split the trade surplus (also called gains from trade) equally (symmetry).

3) We’re assuming that Added Value (AV) is important… but we’ll hold off on this for now and come back to it during multilateral negotiation.

Important concept! In bilateral negotiation, the value (or surplus) created = the value with the transaction minus the value with no transaction (not the difference between various trades we can make). This equals the individual values retained by each party without trade. Keep this in mind when solving problems.

The next concept in particular makes limited sense.

1) We’re assuming that we KNOW the other person’s WTP and WTS. Obviously this is false, but we have to use this for computational purposes.

In computing, we can use 3 methods, which are equally valid.

1) Find WTS, WTP, take midpoint (works only for Bilateral)
2) BATNAs (stands for Best Alternative To Negotiated Agreement).
3) Group decision tree

See below.

^_^