Negotiation: Game Theory

Introduction

Our group decided to work on the topic three: "The use of Game Theory could be a powerful force in negotiation. Investigate the different ways that Game Theory can be used or manipulated to change an outcome in a negotiation". The modern Game Theory was created in 1944 with the book "Theory of games and economic behavior" by Oskar Mogenstern and John Von Neumann. It was also developed a lot in the 1950's with several studies by John Nash.

After our seminary about negotiation we thought it would be very interesting to make some research about the Game Theory. Indeed, we made some researches on the Game Theory in our first year in IÉSEG in our economic classes. That is why we were a bit surprised to see that this theory could be also used in a negotiation process to analyze it. It seems to be obvious that using the concepts of that theory could change the course of a negotiation and be understood as a manipulation or just a skill to achieve the goals of the agents in a negotiation.

We decided to divide our work in three parts. First, we will define the Game Theory and make some examples. Secondly, we will make an synthesis on how to act as a negotiator during a negotiation. Finally, on the third part we will talk about the limits and the interpretation we can make on that subject.

Generally, we can say that our goal is to extend the concept of Game Theory. Indeed, we imagined it only in an economic vision and we want to extend it to a negotiation vision.

What is the Game theory?

The Game theory is a method to study the strategic decision-making. More formally, it is «the study of the mathematical models of conflict and the cooperation between intelligent reasonable decision-makers." An alternative term suggested «as a more descriptive name for the discipline " is the theory of interactive decision. The Game Theory is mainly used in the economy, the political science and the psychology, as well as the logic, negotiation and the biology. The subject of the (landed) at first sent zero-sum games, such as the earnings(gains) of a person equal exactly the clear(net) losses of the other participant (s). Today, however, the Game theory applies to a vast range of relations of class and developed in a term of umbrella for the logical side of science, to include both man and non-people, as computers. Classic uses include the direction of the balance in numerous games, where every person found or developed a tactics which cannot successfully better its results, given the other approach.

Theory

Making commitments: promises and threats

The first assumption to be made is that the goal of any negotiation is to enlarge the pay off for both sides, and in most cases agreements has to be made in order to achieve getting a Win/Win situation. These agreements can be made by making either promises or threats. In both cases, the idea is to benefit from an enlargement of the total pie obtained by making commitments.

Basic situation

In the following example, both sides are looking forward to getting the better pay off.

At first sight, Neil seems to have a better hand since he is able to have payments by using both of his strategies while Bob can only win by using strategy 1.

It is obvious that Neil would better use strategy 1 in order to maximize his payoffs expectations. But Bob would probably prefer using his second strategy than winning less than Neil, though it would result in a Loose/Loose situation.

Bob will probably threatens to take strategy 2 if Neil chooses the first one. The only way to obtain a Win/Win situation though is for Neil to make a commitment: he must promise to choose 2 if Bob chooses 1.

This is the most basic commitment example.

Unique Win/Win situation

In the following one, there is one only scenario which allows the two player to win, but commitments must be made buy both sides in order to reach the best situation for both.

Here, Neil will probably initially chose strategy 1 in order to avoid loss, but he won't be able to gain anything though. Bob would probably choose to maximize his payoffs expectations by choosing the first strategy. Finally, neither Bob nor Neil will get payoffs, so that we obtain a Loose/Loose result, which is not acceptable.

They both have to promise to choose the second strategy in order to win.

Commitments and side payments

In this last example, it is not possible to reach a Win/Win agreement but by making side payment. Side payments allows to change the total pie, and though to reach the targeted situation.

In this particular scenario, initially Neil would choose the first strategy, which is not acceptable for Bob in both cases. Moreover, Bob can't threaten Neil to choose either a strategy or another. This is a very bad situation for Bob. He will probably choose strategy 1 in order to minimize Neil's payoffs, and though gain nothing.

But, fortunately he can also promise side payments, which could change the total pie. As a matter of fact, if he pays $2 for Neil to pick strategy 2, we create a Win/Win situation which will allow both sides to get payoffs.

Through this part we're going to apply the concept of promises and threats into a concrete situation of negotiation. We set the situation, we have two participants, one will be selling an apartment two a possible buyer. At first sight, the man in power is the seller as he fixes the price. Nevertheless, the buyer can use the threat technique, saying he won't accept the offer. This decision would place our two actors in a lose/lose situation. Indeed, if the buyer is in the situation of losing the negotiation he will choose to make his opponent loose too. Thus in order to obtain a win/win situation, the seller must not be too greedy to convince his customer. In another way, if the seller wants to be sure to succeed, he can promise the buyer an offer that will automatically put the buyer in a state of winning.

Prisoner's dilemma

The prisoner's dilemma is one of the most famous games. It is quite easy to understand and gives a good idea of different possibilities in negociation and the interest of cooperation.

The main idea is that two burglars get caught by the police after