Negotiators are strongly advised to identify viable alternatives that they can fall back on during a negotiation. After all, alternatives give negotiators the power to extract more concessions from their opponent. The better your BATNA (Best Alternative To a Negotiated Agreement) the less dependent you are on the other negotiator for finalising a deal. In fact, past research has shown that negotiators with better alternatives generally end up with superior outcomes because alternatives offer the luxury to walk away from the bargaining table.
Next, we wanted to examine whether negotiators with a weak or with no alternative would make higher first bids. We recruited a group of participants and told them to imagine that they were selling a secondhand CD by The Rolling Stones. We then randomly assigned them to three groups and gave each group different information about their alternatives. The first group was told that they had no alternative offers. Thus, if the negotiation failed they would end up with no money. The second group was told that another buyer had offered just US$2 for the CD. And the third group was told that another buyer had offered US$8. In other words, some negotiators had no alternative, some had a weak alternative, and some had a strong alternative. We then asked all participants to make a first offer and to indicate how powerful they felt.
Not surprisingly, negotiators with the strong alternative felt the most powerful, followed by those with the weak alternative, and those with no alternative felt the least powerful. Despite feeling more powerful, however, those with a weak alternative made lower first offers than those without an alternative. Those with strong alternatives always did the best. This study shows the ironic influence of negotiation alternatives: although alternatives may make negotiators feel powerful, they can also constrain negotiators and reduce the value of their initial bid. In other words, having no alternative can be psychologically liberating and allow negotiators to make more aggressive first offers.
Powerlessness can help negotiators seal the deal
We then took our research one step further to see whether negotiators without alternatives would not only make higher first offers but also achieve better agreements than those with unattractive alternatives. In the next experiment, participants were put in pairs and took the role of a buyer and a seller. The seller had a Starbucks mug to sell and would meet face-to-face with the potential buyer. Before the meeting, however, the seller got a phone call from another buyer (for which we used a laboratory confederate). In half the cases, the caller informed the seller that he was not interested in buying the mug. In the other half other cases, the caller made a low-ball offer to the seller. After the phone call, the seller went into another room and negotiated face-to-face with the buyer.
The results again backed up our predictions. Sellers without an alternative offer felt less powerful, but made higher first offers and negotiated a considerably higher sales price for the mug than sellers with a weak alternative.
If your alternative is weak, focus on your target price
Unfortunately, negotiators often end up with unattractive offers and cannot always improve their bargaining position before entering a negotiation. Thus, we wanted to see whether there is a way to reduce the negative impact of weak alternatives. Because negotiators tend to rely on and anchor too heavily on their alternatives, we instructed half of the negotiators to think about and focus on their alternative and the other half to think about and focus on their target price (i.e. the ideal price at which they could sell). As expected, negotiators with unattractive alternatives only negotiated worse deals than those without alternatives when they focused on their alternative. However, when negotiators focused on their target price instead, there was no longer a difference in their performance.
Thus, negotiators who are unable to obtain strong alternatives should be wary of low anchors. In contrast, negotiators without any alternative may not have to worry about their powerlessness and instead should spend their resources on making the right first offer.
[This article is republished courtesy of INSEAD Knowledge
http://knowledge.insead.edu, the portal to the latest business insights and views of The Business School of the World. Copyright INSEAD 2023]