NYU Stern School of Business
Conflict & Negotiation
Summer 2000
Professor Seth Freeman
Class 10
Distributive Bargaining and Coping with Hard Bargaining
I. The Elmtree House Simulation
II. Advanced Distributive Bargaining
A. Merger & Acquisition Exercise (time permitting)
B. The bean jar auction (time permitting)
C. Auction traps and strategy
III. Using I FORESAW IT to prepare for distributive bargaining and auctions
s
The Elmtree House Negotiation
(Confidential Information for Petricelli, Elmtree House's Representative)
You are Petricelli, a member of the board of directors of Elmtree House. Elmtree
House is a halfway house for young men and women ages 18-25 who need help moving
from mental institutions back into society.
Many residents have had nervous
breakdowns, were borderline schizophrenics, or were involved with drugs. Located on
the outskirts of New York in the semi-industrial section of Elmhurst, Elmtree House
accommodates about twenty residents. The neighborhood is in a transition stage;
some say that it will deteriorate further, others say that it is on the way up. in any case,
the noise and pace of the area make it less than an ideal place for the residents.
Although the house is quite run down, it sits on a large one and a half acre lot.
Your board once considered moving, but decided a move would cost too much.
However, unexpectedly a few months ago, a man named Mr. Wilson approached one of
your directors, Mrs. Peters, who lives in the house with her husband and child. Wilson
said his real estate development firm, Harrier Development Group, might want to buy
the property. Mrs. Peters told him she hadn't considered selling but if the price was right
she might. Wilson gave her his card and said he'd like to talk about it further if there
were a chance for a deal. The board quickly met, asked you to follow up on this
promising lead, and gave you full authority to negotiate. Of course, any transaction will
eventually need formal board approval, but that will probably be a formality.
After careful thought, you decide to call Wilson and ask him to meet for a drink at a
nearby hotel to discuss possibilities. From that conversation and other research into
Wilson's business affiliations, you learn the following: Wilson is a legitimate
businessman of decent reputation. You feel that his company wants Elmtree House as
a possible site for a condominium. Wilson wanted to talk about money right away, but
you said you needed two weeks to prepare.
During the next 12 days you do several things. First, you prepare an
IFORESAWIT plan.
The plan reveals that while there may be some creative
possibilities, for the most part the talks will focus on price. Therefore, you try to do
some factual research to learn Elmtree House's reservation price or walkaway pricethat is, the minimum price that Elmtree House's board would accept. The reservation
price is hard to determine since it depends on likely offers from other owners in the
neighborhood. Given the unusual nature of your property, it is not clear that you would
be able to sell it on the open market for a large amount. By examining sales prices of
houses in the vicinity and by talking to realtors and real estate experts, you learn
that Elmtree House is worth between $110,000 and $145,000 on the open market. How
disappointing!
Would that much money be enough to meet the minimum costs of a move? It depends
on what other sites re available. After more research, you learn of two suitable places
in Kew Gardens and Briarwood. You talk to the owners there and learn the properties
could be had for $175,000 and $235,000 respectively. You decide that Elmtree House
would need at least $220,000 before you could move to Kew Gardens and at least
$275,000 before you could move to Briarwood. These figures take into account the cost
of moving, minor repairs, insurance, and a small cushion for unseen costs. The
Briarwood site is much better than the Kew Gardens site, which is much better than
Elmtree House. So you decide that your reservation price will be $220,000; if you
receive a lower offer, it would be better to just stay put.
What is Wilson likely to pay? It's difficult to judge what his reservation price will bethat is, his maximum price. You have no expertise about developing property, so you get
advice from several real estate experts, including some at the business school, and you
speak to two contractors in the area. Your experts don't agree with each other about the
maximum price, but each tells you it depends on Wilson's intentions. Is he buying up
other land too? (Yes, you later learn.) If so your property may be a key piece in his real
estate 'puzzle'. How high a building would he be permitted to build? (Hard to say, you
learn.) The higher the building the more profit he expects and the more valuable Elmtree
House becomes. After ten hours of work, you find you are hopelessly vague about your
assessment of Wilson's reservation price. The best you can do is create this chart
showing the likelihood that different prices might actually be Wilson's reservation price:
$275K
$475K
Probability
25% (lower
quartile)
0
50%
25% (upper
percentile)
$100K $200K $300K $400K $500K $600K
$700K
Price
Two days before the negotiations, you would bet even money that Wilson's reservation
price is between $275,000 and $475,000. But it could be much higher. Or much lower.
You are about to meet Wilson to negotiate a possible sale. As you prepare, consider these
questions:
1. What should be your 'Louis number'?
2. Who should make the first offer?
3. If Wilson insists that you make the first offer, what should your offer be?
4. If Wilson opens with x thousand dollars, what should your counteroffer be?
5. What should be your 'walkaway' price?
You will have 20 minutes to negotiate. When instructed, post your results on the
board.
The Bean Jar Auction
We are about to auction off one bean jar, which contains valuable beans. Please
form a company of five students and choose a name for your company. Next,
carefully examine the replica of the jar of beans which I will give you. You may
examine the jar any way you want except that you cannot open the jar. The bean
jar I give you to examine is an exact replica of the one actual bean jar I will
auction, identical in size and number of beans. (There will only be one bean jar on
the market; all the others are merely worthless replicas and are not for sale.) Each
bean in the actual jar is worth $0.01, and whoever wins the auction will receive a
payment from me equal to the exact value of the total number of beans in the jar.
(Thus, for example, if you make the winning bid of, say, $0.10 and the actual
number of beans in the jar is 25, you will pay $0.10 and receive back $0.25 for a
net gain of $0.15). While the money involved is small, your board of directors
will be watching your work closely to see if you can handle the auction wisely.
Therefore, much depends on your success handling this auction.
Your first task then is to decide amongst yourselves how much the bean jar is
worth- that is, how many beans are in the jar. Next, you must decide when and
what to bid for the actual jar that is available for sale I will then conduct an open
auction for the jar. You will bid actual money and I will actually collect that
money from the group that wins the auction. The bidding will start at $.010 and
will go as long as you are willing to bid.
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