Negotiations are effective for concluding an agreement, in the following circumstances:
- When many factors bear not only on price, but also on quality and service
- When business risks cannot be accurately predetermined
- When a long period of time is required to produce the items purchases
- When production is interrupted frequently because of numerous change orders
Negotiation is appropriate whenever a zone of agreement exists, when there are simultaneously overlapping acceptable outcomes for the parties. Suppose two parties are negotiating a price. The seller has a reservation price‘s’, which is the minimum he will accept. Any final contract value ‘x’ that is below s is worse than not reaching an agreement at all. For any x > s, the seller receives a surplus. Obviously, the seller desires as large a surplus as possible while maintaining good relations with the buyer. Likewise, the buyer has a reservation price ‘b’ that is the maximum he will pay; any x above b is worse than no agreement. For any x < b, the buyer receives a surplus. If the seller’s reservation price is below the buyer’s, i.e. s < b, a zone of agreement exists, and the final price will be determined through bargaining.
There is an obvious advantage in knowing the other party’s or the supplier’s reservation price and in making one’s own reservation price seem higher or lower than it really is. The openness with which buyers and sellers reveal their reservation prices depends on the bargainers’ personalities, the negotiation circumstances, and expectations about future relations.
