There are many situations in life that involve negotiations. Obviously, business is full of negotiations in which two parties have to come to an agreement. Couples negotiate over who will do various chores. Friends negotiate about how to spend an evening out.
When you are in the middle of negotiation, is it best to make the first offer, or to wait for the other party to make the first offer and then respond to it?
An interesting paper in the April, 2014 issue of Psychological Science by David Loschelder, Roderick Swaab, Roman Trotschel, and Adam Galinsky suggests that whether it is best to make the first offer depends on two factors: whether the parties have similar goals, and whether the parties tend to have a strong profit motive.
Obviously, when two parties completely agree, there is no negotiation at all. But, often the parties agree on some issues and disagree on others. For example, a company trying to sell a factory to a second company will probably disagree on price. The seller will want to get a high price, while the buyer will want to pay as little as possible. But, the parties may agree that it would be better for the sale to occur late in the year rather than sooner in the year.
These researchers suggested that when the parties disagree on an issue, then it is better to make the first offer. This initial offer serves as an anchor for the negotiation. The price will eventually be adjusted through negotiation, but the initial offer biases the final offer in favor of the person who made that initial offer.
When the parties actually agree on an issue, though, the situation reverses. Now, the party who makes the first offer reveals that their goal is actually similar to that of the other party. The recipient of the offer can exploit this information by pretending to agree reluctantly to that part of the offer and extract other concessions from the party that made the offer.
To test this possibility, the researchers had pairs of business school students play a negotiation game involving a scenario in which one party was trying to sell a factory to a second. The scenario was set up so that the seller needed to get at least $17 million dollars for the sale, while the buyer couldn’t pay more than $25 million. The other dimension of negotiation was the date the sale would take place. For some pairs, their goals were incompatible. The seller wanted the date to be as late as possible in the year, while the buyer wanted it to be as early as possible. In the other condition, the goals were compatible. Both parties wanted the sale to be as late in the year as possible. Neither participant in the negotiation knew the goals of their partner. The seller was asked to make the first offer, and then they negotiated from there.
When the parties had incompatible goals for both dimensions, then the final outcome tended to favor the seller (who had made the first offer). That is, the final negotiation involved a higher sale price and a date later in the year. When the parties had a compatible goal for the sale date, then the final outcome tended to favor the buyer. That is, buyers were able to get a lower sale price to compensate them for the later date, even though that later date was actually beneficial to both parties.
A second study found that people’s willingness to exploit the information about the compatible goal depended on their general tendency to favor the self over others. Participants in this study performed a similar negotiation, but the researchers measured whether participants tended to be pro-self (maximizing their own profits) or pro-social (maximizing the collective benefit). Pro-self participants got a much better deal for themselves than pro-social participants when their partner revealed a compatible goal with their initial offer. The pro-social participants did not use the compatible goal to their advantage.
What does this mean?
When negotiating with someone else, you have to consider both the social setting and the goals you have. In social settings with friends or family, it is probably best to try to maximize everyone’s benefit rather than trying to “win” the negotiation. When you ought to be pro-social, it is valuable to have information about other people’s goals so that you can try to work out a solution where everybody wins.
In business contexts, where you often have to maximize your own company’s profits, you should make the first offer when you are fairly certain that you and the other party disagree. That will allow you to set an anchor that influences the rest of the negotiation. When you are not certain whether you agree, though, you should wait for the other party to make an offer. Their offer will give you information about whether you have similar goals or different ones.
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