The Limits of Negotiation: A Little Applied Game Theory



INTRODUCTION

Much of the political news is about negotiations.  American politicians, in both domestic and foreign disputes, don’t seem to know much about negotiation strategy.  Maybe a little applied game theory would help.

IS NEGOTIATION POSSIBLE? 

The first question is whether or not negotiation is possible or just a waste of time and effort.

Negotiations will be fruitless if at least one party believes there are no possible outcomes that are better than not negotiating.  Compromise is impossible.  Fanatics, true believers, proponents of “Victory at any cost” or “Give me victory or give me death” or parties who believe their opponents are evil are not likely to negotiate.

Sometimes leaders act to limit their options or those of their followers.  The famous historical example is when Cortes burned his boats that brought him and his men to Mexico.  Returning to Cuba was no longer an option.  Cortes forced his men to make the “credible” commitment to conquer the Aztecs.  By their past actions, Israel’s policy of never negotiating with airplane hijackers is credible.

Bashar al-Assad of Syria has put himself and his regime in this situation through the brutality of their past actions.  He has eliminated any option for himself except being dictator or being killed.  At this point, there is nothing to be gained by negotiating a political settlement.

 In business and other types of negotiations, there are two stages. Both sides of a potential agreement must believe that they will benefit from an agreement - increased sales, reduced costs, increased profit. This is the "win-win" or "positive sum" stage. The second stage is how the increased benefits are to be split. This is a "zero-sum" negotiation.

THE LIMITS OF NEGOTIATION


There are limits to what a party to a negotiation will accept.  These limits are set mostly by a party’s perception of the consequences if no agreement is reached.   When President Obama negotiated budget reductions in 2011 under House Republicans’ threats to shut down the Federal government, he was facing reelection and felt pressure to compromise.  In 2013, after winning reelection, he felt he was in a stronger position to resist Republican demands.  The consequence of losing an election had disappeared.

Knowing this, why did the Republicans again threaten to close down the government?  Because they perceived that the consequences of not challenging the president were greater than challenging the president and losing.   The Republican Party was becoming increasingly conservative.  The vast majority of House Republicans knew they came from safe districts.  The major threat to reelection in 2014 was losing to a more conservative Republican in the primary.  By again threatening the extreme action of shutting down the government they eliminated the main argument of a potential Republican primary rival.

In addition, although circumstances had changed, President Obama’s compromises in 2011, seen as a victory by many Republicans, cast doubt on the credibility of his threat not to negotiate. 

INCREASING THE CHANCES TO NEGOTIATE

One way to increase the chances the other party will negotiate is to change the “payoff matrix” or cost/benefit of analysis of the other party, preferably before negotiations begin.  The idea is to raise the cost of not negotiating or increasing the options of the other party in negotiations.

Iran is a recent example.  For years, Iran went through the motions of negotiating a moratorium on enriching uranium to develop an atomic bomb.  As long as the rest of the world thought there might be a chance of Iran slowing or stopping its atomic bomb project, there were no consequences to Iran of continuing the program.  They were even able to buy thousands of centrifuges from a West German company.  It was only after the United States and Western Europe finally imposed economic and financial sanctions that Iran was willing to seriously negotiate.  The sanctions had wrecked the economy and threatened the ayatollahs’ rule.

THE ULTIMATUM GAME 

This has become one of the most famous games in game theory.  It has been played many times by different groups in different countries.

There are two players.   One player is given an amount of money.  He has to offer part of the amount to a second player.  If the second player accepts, they split the gain.  If the second player refuses, neither player gets any money.  This puts a limit on the number of possible outcomes.  One party maybe be better off accepting a proposal than refusing to negotiate but may decline the proposal because it is not “fair.” 

To an economist, the offer is obvious.  If the amount is $1, the first player offers the second player the minimum, one cent.  The second player is better off accepting than refusing, so he accepts.  But that’s not what happens when the game is actually played.  For almost all groups and across different cultures, the second player typically rejects offers below 25-30% of the total.  There is an almost universal sense of “fairness.”  Even worse, the second party may feel insulted by the offer, making future and better offers more likely to be refused.

MORE THAN TWO PLAYERS 

In general, the more players there are in a game, the more difficult it is to reach an agreement.  Even a relatively weak or unimportant player can threaten to “hold up” an agreement at the last minute unless they get a better payoff.  This is true of global trade agreements and close votes in Congress.

This is also one reason that the Assad regime in Syria has a good chance of surviving.  There are at least 20 anti-government organizations fighting the regime.  They have different sponsors and different visions of what a post-Assad Syria should be like.  Recently, they have been fighting among themselves.  In addition, the Syrian regime can count on financial and military support from Iran and military assistance from Hezbollah.  The regime also has some military support and diplomatic cover from Russia.

CONCLUSION 

While much of the discussion about negotiation is about how to negotiate, assumptions about the players are important.  Negotiations have a greater chance of succeeding if all the players share some basic assumptions, see a noticeable advantage of negotiating versus not negotiating, see the game as fair, and intend to actually abide by the agreement.  Even when negotiations lead to a treaty or agreement, they are often only a ploy by one side to buy time, to temporarily ward off sanctions or conflict.

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Related Post:

 President Obama Learns Some Game Theory




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