An Essay on Bargaining PDF

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chap 2 An essay on bargaining T. Scheilling...

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Thomas C. Schelling, The Strategy of Conflict. Cambridge: Harvard University Press, 1960. Chapter 2: An Essay on Bargaining “This chapter presents a tactical approach to the analysis of bargaining.” (p.21) It deals with the distributional aspect of bargaining, where a better bargain for one translates as a worse bargain for the other. In this case each party is guided by its expectations of what the other party will accept. Since both parties are mutually aware that they are guided by expectations, the only way to reach a bargain is through a concession. But why would anyone choose to concede? The logic behind concession is that some agreement is in many cases better for both sides than no agreement at all. However, it is hard to determine who will concede and how much he will choose to concede. In that respect, a thorough understanding of the tactics employed can be illuminating. “The purpose of this chapter is to call attention to an important class of tactics, of a kind that is peculiarly appropriate to the logic of indeterminate situations. The essence of these tactics is some voluntary but irreversible sacrifice of freedom of choice. They rest on the paradox that the power to constrain an adversary may depend on the power to bind oneself;” (p.22) According to Schelling, making your commitment credible and irreversible strengthens your overall bargaining position. Power, strength and skill—contrary to commonly held beliefs—are not always an advantage in bargaining. They might not get you far if you are dealing with a stubborn and unsophisticated counterpart. People in bargaining positions should note that bluffing, either by tactic or deception, can be an important element of bargaining. But considering it is easier to prove true something that is actually true rather than something that is false, how does one person make another believe something especially if that something is not true? “Answer: make it true” (p.24) Shelling provides a buyer and seller of a house example to illustrate his point. “…if the buyer can accept an irrevocable commitment, in a way that is unambiguously visible to the seller, he can squeeze the range of indeterminacy down to the point most favorable to him.” (p.24) Commitment will only work if it is communicated and viewed as credible. In a world where absolute commitments are freely available and practical problems are absent, we have a game with a first move advantage: whoever commits first wins (assuming the commitment is absolute and there are no communication difficulties.) It is thus clear that there is a logic behind selfcommitment that can bring about a more positive outcome. For instance, “when national representatives go to international negotiations knowing that there is a wide range of potential agreement within which the outcome will depend on bargaining, they seem often to create a bargaining position by public statements, statements calculated to arouse public opinion that permits no concession to be made. If a binding public opin-

ion can be cultivated and made evident to the other side, the initial position can thereby be made visibly ‘final’.” (p.28) In sum: 1) Incurring a commitment is not sufficient in itself; it is essential to convincingly communicate it to the other party. 2) Establishing the commitment is not easy; neither is it easy to convey to the other party how strong your commitment is. 3) Similar activity (i.e. choices of commitment) might be available to both parties. 4) Though the possibility of commitment might be available to both sides, it is not necessarily equally available (i.e. one party might be able to more readily commit than the other). 5) There is always a possibility of a stalemate due to lack of adequate communication or the establishing of an immovable position that goes beyond the ability to concede. The ease or difficulty of a commitment tactic also depends on certain institutional and structural elements of the bargaining situation. These structural characteristics may make commitment more possible to one party than the other. For instance the decision to use a bargaining agent, the decision to put one’s reputation at stake through public commitment, the choice to negotiate other topics simultaneously or in the future are some of the structural elements that can affect the bargaining situation. Another important element that needs to be considered is that of casuistry: if one party reaches the stage where concession is advisable, he has to make sure that his constituency does not perceive of this concession as capitulation. “One, therefore, needs an ‘excuse’ for accommodating his opponent, preferably a rationalized re-interpretation of the original commitment, one that is persuasive to the adversary himself.” (p.34) It is thus to party A’s advantage to facilitate the concession coming from party B by showing to party B that it can make a moderate concession which is consistent with his former position. According to Schelling there are two types of threats: 1) Threats that each party has every incentive to carry out in retaliation to an unfavorable move by the other side. The potential deterring effect of these threats is not their primary function. 2) Threats that each party has no real incentive to carry out and whose specific purpose is to deter through promise of mutual harm. Committing oneself to an act one would rather not perform, as a way to deter the other party, can be successful if the party commits to the point of no return, forcing the other to concede if it wants to avoid mutual destruction. “When a person has lost the power to help himself, or the power to avert mutual damage, the other interested party has no choice but to assume the cost or responsibility.” (p.37) The party threatened also has some options: it can perform the act before the threat is communicated by the other party, it can arrange to share the risk with others, or it can choose to misrepresent its payoffs.

In order to maximize the credibility of a threat, it needs to be stated in terms that are precise and irreversible and clearly communicated to the other party. Additionally, it is preferable to decompose a serious threat a series of smaller consecutive threats. Any transgression would be punishable, indicating in a sense the party’s commitment to the threat. “Similar to decomposing a threat into a series is starting a threat with a punitive act that grows in severity with the passage of time.” (p.42) “The promise is a commitment to the second party in the bargain and is required whenever… an agreement leaves any incentive to cheat.” (p.43) In the case of promises, fulfillment is not always observable because it is not always possible to measure compliance. As a result, the promise might have to be expressed in observable terms that might in actuality not be the intended object of the bargain. Decomposition is applicable to promises as it is to threats. There is in a sense a repeated game mentality: agreements are enforceable if the parties are concerned to maintain future opportunities for agreement. The value of trust and future interaction “outweighs the monetary gain from cheating in the present instance.” (p.45) Even if there won’t be any interactions in the future, a sense of recurrence could be constructed by dividing the issue in consecutive parts....