The Strategy of Bargaining
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This course takes the "teach a man to fish" approach--rather than blasting you with random bargaining tips, we discover how bargaining works, why some people win more than others, and when bargaining fails. Borrowing heavy from game theory, we build simple yet insightful models of bargaining and untangle the logic. Whether you are a professional negotiator or just want a better deal on a car, this class is for you.
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|Section 1: Introduction|
Imagine another company offered you $20 to work for them. Your current company would like you to stay and is willing to pay up to $50 to keep you there. As such, both of you can gain by agreeing to a deal between $20 and $50.
But what will it be? Values closer to $20 is good for the company and bad for you, while values closer to $50 is bad for the company and good for you.
Ultimately, anything that pushes the wage closer to where you want it is a form of bargaining power. This course investigates the sources of bargaining power to put you in a better position to win your negotiations.
Minor correction around 3:50 in the video--the trivial cases are where the employer values you at less than or equal to $20. The non-trivial cases are where the employer values you at greater than $20.
|Ultimately, our goal is to understand the sources of bargaining power. Over the course of the lectures, we will cover eight such sources: proposal power, patience, outside options, monopoly power, reputation, credible commitment, costly signaling, and knowledge of the other side. This lecture previews those topics and provides intuition as to why they are helpful in bargaining.|
|Why focus on models to understand bargaining? What are some of the weaknesses of modeling?|
|This lecture wraps up the introductory chapter. The second chapter will introduce the basic models of bargaining. The third chapter expands the basic models to allow us to analyze bargaining power. Finally, the fourth chapter explains how bargaining can fail even if mutually preferable agreements exist.|
|Section 2: Modeling Bargaining|
|Since assumptions drive the results of models, we spend a lecture discussing some of the important assumptions of the ultimatum game.|
|With the assumptions out of the way, we now solve the ultimatum game. The side with proposal power reaps nearly all of the benefits. The side without proposal power fares only slightly better than if no trade occurred.|
|Lecture 7||6 pages|
|Need to review the logic of the ultimatum game? Check out these written notes.|
|How do experimental results compare to the ultimatum game's theoretical result?|
Two super-smart players are going one-on-one in a game of Monopoly. What sorts of trades are possible?
|Previously, we constrained the parties to bargain in whole dollar increments. Here, we allow them to go to one cent increments. The proposer gains even more bargaining power as a result.|
|In some cases, it makes sense for parties to bargain over fractions of a dollar. This means we can treat the surplus as a continuous amount. Now the proposer receives all of the surplus. Thus, the receiver has no bargaining power unless the bargaining space is discrete.|
|A majority vote is required to pass legislation in the U.S. House of Representatives. However, not every bill goes up to a vote. The Hastert Rule says that a majority of the majority party must approve a bill for it to be proposed to the floor. This proposal power gives an amazing advantage to the majority of the majority but means that some bills never become law even if they have substantial support from members of the House.|
Federal judges' lack of proposal power leaves the judicial branch weaker than other branches of the U.S. government.
|Delay is costly--finishing a deal and sharing the wealth today is better than finishing a deal and sharing the wealth at a later time. To model the time in between offers appropriately, we need to account for that delay. This lecture introduces the discount factor for that purpose. We will use it beginning with the next lesson.|
|What happens if we allow individuals to make counteroffers to proposals they don't like? Things can radically change.|
|Why stop at just an offer and a counteroffer? This lecture shows what happens if the sides can exchange a total of four offers. Interestingly, a pattern emerges.|
|Rubinstein bargaining develops a situation where two parties can continue negotiating forever until they reach an agreement. If the parties are extremely patient, the distribution is equitable.|
|Lecture 18||4 pages|
|Want to learn more about Rubinstein bargaining? Read these notes on bargainers' optimal strategies when the number of possible offers is truly infinite.|
|Before, the players had the same level of patience. Now we allow their levels of patience to vary.|
|Bargaining isn't fair--those who need a deal the most get the least benefit from it.|
|Quiz 1||5 questions|
|Test your knowledge of the basic models of bargaining.|
|Section 3: Gaining Bargaining Power|
|As we study other forms of bargaining power, we must choose whether to use richer, alternating offers models or simple ultimatum games. Since both show the same thing, we will opt for the latter choice--it will save us time and headaches.|
|In McDonald's Monopoly, a Park Place piece and a Boardwalk piece are worth $1,000,000 together. How much are they worth individually?|
Why was Warren Buffet never worried he would have to give away a billion dollars? It's a lesson in bargaining from one of America's richest men.
|The De Beers diamond company turned nearly valueless gems into a big money maker. Here's how.|
|If you--and you alone--can bring $60 extra dollars an hour to a business, how much of those additional profits go to you?|
|Baseball players were once stuck playing with their current team so long as their current team still wanted them. Free agency brought freedom to the players--as well as a much larger share of the bargaining surplus.|
|Outside options are the alternatives someone has if bargaining fails. Don't be afraid to flaunt them!|
|Most people completely blow it when they buy a car. Here's how not to.|
|As a car buyer, you have a distinct advantage: you can find out the dealer's bottom line, but the dealer cannot find out your bottom line.|
|Actors can use threats to gain bargaining leverage...but only if those threats are credible.|
|Sometimes limiting your future options is the only way to win.|
|You can make a threat credible by finding someone to punish you if things don't go so well.|
|Hiring hotshot negotiators can improve one side's bargaining position. But it comes at a cost...|
|Quiz 2||3 questions|
|Test your knowledge on the sources of bargaining power.|
|Section 4: Bargaining Failure|
|How does bargaining change if actors don't know how far the other will go to get a better deal?|
|Bargainers facing with uncertainty are in a no-win situation--either they play it safe and receive little from the deal, or they make aggressive offers and risk rejection.|
|Lecture 36||3 pages|
|Uncertainty leaving you uncertain? Read these notes on the risk-reward tradeoff.|
|What's the point of labor strikes?|
In August 2013, Time Warner Cable blacked out CBS when they failed to agree on a retransmission fee. This lecture explains why bargaining failed and they came to terms a month into the blackout.
Why did the United States Government shutdown in October 2013? Uncertainty provides one explanation.
|In bargaining, perceived weakness is real weakness.|
|Things can go awry if only one side knows the real value of a bargaining good. CARFAX to the rescue!|
|A college education can be rewarding even if the college doesn't actually teach you anything.|
|Lack a third party to enforce the terms of your contract? You might be in trouble, as Walter White from Breaking Bad discovered.|
|Breaking up a transaction into many little pieces allows for cooperation contingent cooperation, which resolves commitment problems.|
|Website rating services like Yelp help resolve commitment problems by enhancing (or harming) reputations. Want to take things a step further? Purchase a Yelp shirt.|
|Countries don't have a world police to run to when someone breaks an agreement. So why doesn't war happen more frequently?|
|Quiz 3||4 questions|
Test your knowledge of this unit.
|Section 5: Conclusion|
|If you learned anything from this course, it should be the following two points...|
William Spaniel (PhD, University of Rochester 2015) specializes in formal theory and international conflict. Motivated by the United States's continued negotiations with Iran, his research investigates how bargaining has stymied nuclear proliferation for the past half-century.
He is currently an assistant professor in political science at the University of Pittsburgh and was previously a Stanton nuclear security postdoctoral fellow at Stanford University's Center for International Security and Cooperation. He has been teaching game theory since 2009, and his lectures have been viewed millions of times around the world. In 2011, he published the best-selling textbook Game Theory 101.