Co-opetition Interactive is © 1996 by the Authors.
University of Chicago Business School professor Rob Gertner and NYU Law School professor Geoffrey Miller have come up with a better way to negotiate. They've devised some ingenious rules that enable people to behave reasonably without having their lunch eaten. They call their negotiation method "settlement escrows."
Here's how settlement escrows work. The buyer and seller agree to bring in a neutral third player to act as mediator. The seller tells the mediator, in private, a price at which he'd be willing to sell. Likewise, the buyer lets the mediator know, again in private, a price at which he'd be willing to buy. The mediator checks to see whether the two prices cross--that is, whether the buyer's offer exceeds the seller's bid. If so, the mediator calculates the midpoint price, and seller and buyer transact at that price. If the two prices don't cross, the mediator doesn't reveal either price. He announces only that the prices didn't cross. Neither side learns the other's bid, and the two parties can go on negotiating without prejudice.
The following Java applet replaces the role of a mediator with a computer. The buyer goes first and types in an offering price or bid. Then he or she hits the "bid" button and the number gets hidden. Next, the seller takes a turn at the screen, types in the asking price and clicks on the "ask" key.
At this point the two sides can rejoin and click on the "compromise" key. The result will tell them either (i) that their numbers did not cross and so no compromise is possible or (ii) that their numbers did cross and the value of the resulting midpoint.
Before you employ this tool, allow us to explain why it allows you to be much more honest without getting burnt. Let's take a case where you as the seller are truly willing to sell the item at $120. But you don't want to give it away at $120 if the buyer is willing to pay much more. Under the new scheme, it's now much safer for you to ask for $120. If the buyer inputs a price above $120, the deal is done at the midway price. Thus, if the buyer quotes $160, he ends up paying you $140. That's fine by you. You get more than you asked for. And while the buyer now knows you asked for $120, and may be kicking himself for not typing in a lower price, it's too late for him to do anything about it. The game is over. Those are the rules. As the seller, you're protected.
What if the buyer inputs a price below $120, say $110? Then the deal doesn't go through. True, you and the buyer will have to try some other way to reach an agreement. But in making a reasonable opening demand, you haven't compromised your position in any subsequent negotiations. All the computer reveals is that the prices didn't cross. The buyer knows that you asked for a price above $110, but that's all he knows. He doesn't know whether you asked for a little more or a lot more. Since the buyer doesn't have the information he'd need to box you in, you're protected once again.
Settlement escrows allow people to negotiate from behind a veil. Ordinarily, when you make a demand, you reveal your hand. Settlement escrows preserve the fog. You can say what you really need without giving away much information. When the parties in a negotiation feel safe enough to make reasonable demands, they're much more likely to reach an agreement. There's a much better chance that whenever there's a mutually beneficial deal to be made, it will be made.
Gertner and Miller conceived of settlement escrows as an aid to pretrial negotiations. You may be willing to pay $100,000 to settle the matter, but you may not want the other side to know that--unless it's willing to settle here and now. If it isn't, revealing the fact that you're willing to settle for $100,000 may be what tips the other side into deciding to go to court rather than to continue negotiations. The solution is for both parties to agree, at the outset, to use a settlement escrow.
The value of settlement escrows obviously isn't limited to the legal arena. The idea could be used in a wide range of situations. We know of two friends who used it to settle on the sale price of a house. In other contexts, you might be willing to pay a lot for an employee's services, a parcel of land, or a patent, but you don't want to tip your hand. The employee is willing to work for very little, the landholder is anxious to sell, or the inventor is keen to see his idea commercialized, but none of these people want to tip their hands, either. In all these cases, use of a settlement escrow would maintain a veil over the negotiations, allowing both parties to negotiate in good faith.
Please let us know how well this tool worked for you.