I never get too attached to one deal or one approach. For starters, I keep a lot of balls in the air, because most deals fall out, no matter how promising they seem at first. ~ D. Trump, The Art of the Deal
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; that, in bargaining, weakness is often strength, freedom may be freedom to capitulate, and to burn bridges behind one may suffice to undo an opponent. ~ T. Schelling, Strategy of Conflict
Most of the time, when you purchase an article or service, you are saying ‘yes’ to an ultimatum proposed by the seller. The seller says “You can have this, but you must give me $$$.” Not $$ but $$$. When you buy, you are revealing a preference, namely that you feel (or think) that having the thing is better than having $$$. The seller wants to ask for and receive as much as possible, so he sets the price as high as possible without passing your no-thank-you point. Notice the one-sidedness of this ultimatum. It is not you who is offering just enough for the sale to be of interest to the seller. In most industries and markets, the sellers call the tune. Perhaps they feel pressure from competitors, but they (think they can) sit back and see if you take the deal without concern that you might propose a counter-deal. House markets, car markets, and the Moroccan carpet market are notable exceptions. Being so used to the buy-and-sell ultimatum, we underestimate our bargaining power and we let our negotiation skills atrophy. The sellers have, in this culture, won the war of perception. We accept the take-it-or-leave-it framing of the transaction as a feature or nature – which it is not.
In my quest to acquire an authentic didgeridoo, I found an online seller. The website looked professional and the didges fantastic. I chose one and placed my order. I noticed the seller was willing to accept money orders or two types of credit card. I used one of these cards and was informed that the funds were “blocked,” a matter that could presumably be resolved in consultation with my bank. I, however, thought that I might offer another credit card, the use of which is widespread, but which the seller had not listed as an option. What happened next I saw coming without succumbing to a hindsight bias (Fischhoff, 1975). The seller asserted they would not accept this card as a matter of policy (they charge the seller a bit more). The seller thus restated and reinforced the ultimatum. ‘Pay this amount and do it our way or you won’t receive the product.’
Referring to ‘policy’ is such a common tactic that we no longer notice the misnomer. A policy is a principle of action revealing a set of preferences held by an organization. It often takes the form of an if-then rule. For example, a cash-only policy can be phrased as ‘If a buyer offers a payment in something other than cash, then we will not agree to the sale.’ Policies are familiar (and properly named) in the context of government actions and regulations as well as in the internal workings of organizations. When, however, a business seeks to constrain its partners’ options, it might choose to refer to these constraints as policy, when in fact they are little else than preferences ensuring advantages to themselves. The label ‘policy’ creates an air of officialness and inevitability that discourages a challenge. A business that says ‘We do not accept payment method X’ conveys a pre-commitment to not depart from this line when a transactant makes a counter-offer (Schelling, 1992).
I was quite sure that the didgeridoo merchant would not change course if I offered to pay with card X. To test this hunch, I offered card X, and found that it was indeed declined. No sale was made, which arguably was not an outcome preferred by either party. Let’s review what happened from a game-theoretic perspective. First, the seller offered the familiar ultimatum. 'Here’s our price. Take it or leave it.' Then – after the failed intermezzo with card A – I could have vetoed the proposal, which would have ended the ultimatum game with the inefficient no-gain/no-gain outcome (Güth et al., 1982; see here for an aqueous example). Instead, I proposed a counter-ultimatum ‘Take card X or lose the sale.’ Now the seller vetoed this proposal, banking on the possibility that I would rescind my counteroffer and accept the original deal.
When two ultimatum games are put together, the result is an incomplete game of chicken (Rapoport & Chammah, 1966). Because of the sequential play, there is no opportunity for mutual yielding or cooperative coordination. Either one party does better than the other or both do equally poorly and worse than the chicken who cooperates unilaterally. Per illustration, suppose the seller gets 100 pleasure points from the originally proposed deal if the buyer accepts. Here, the seller does better; the buyer gets only 99 points. In game theoretic terms, the seller defects and the buyer cooperates (chicken!). If the buyer defects (vetoes the offer), both get nothing. The buyer’s counteroffer has 99 points going to the seller and 100 to the buyer. Game theory assumes that these pleasure points (dollars, utils, monetary units) have strict behavioral meaning. More is more. It follows that whoever proposes a deal that would leave everyone better off can and should win big. Game theory also implies that if the first deal is vetoed out of stupidity or cunning, the revised deal ought to be accepted as well because again, more is more.
You think that I rejected the didge seller’s take-it-or-leave-it offer out of spite and you may be right. My introspection is incomplete here. I do know, however, that there are other sellers who might be more accommodating. It is a market economy after all. Let’s not accept first offers as a matter of policy. Let’s not get too attached to a particular deal. Perhaps D. Trump was right about this one.
But let the true people of the didgeridoo have the last word:
Fischhoff, B. (1975). Hindsight is not equal to foresight: The effect of outcome knowledge on judgment under uncertainty. Journal of Experimental Psychology: Human Perception and Performance, 1, 288-299.
Güth, W., Schmittberger, R., & Schwarze, B. (1982). An experimental analysis of ultimatum bargaining. Journal of Economic Behavior and Organization, 3, 367-88.
Rapoport, A., & Chammah, A.M. (1966). The game of chicken. American Behavioral Scientist, 10, 10–28.
Schelling, T. (1992). Self-command: A new discipline. In J. Elster & G.F. Loewenstein (Eds.), Choice over time (pp. 167–176). New York: Russell Sage Foundation.