Can you win a negotiation but lose the game?

Beware of the rival’s call at the negotiation table, as it may tempt you to give too much and gain too little

Featured faculty: Kang Hoonie Sanghoon
Written by Putro Harnowo

Negotiation is something we all do, from bargaining with street vendors to discussing pay rises and making big business deals, such as mergers and acquisitions. At its core, negotiation is about finding a middle ground where both sides feel they’ve gained something.

Traditionally, experts have focused on how the value of alternative offers impacts the deals. For instance, those with a better backup offer are in a stronger position in negotiations. However, a recent study shows there’s more to the story. It turns out that the source of the backup offer can also dramatically affect the negotiation.

A notable example is Boston Scientific’s acquisition of medical device maker Guidant for US$27 billion in 2006 after a two-month bidding war with its rival, Johnson & Johnson. Many analysts agree that the purchase was overpriced, as Guidant had been struggling with product recalls, and the deal spiralled into lawsuits and fines in later years. Apparently, Boston Scientific wanted to prevent Johnson & Johnson from dominating the cardiovascular device market.

Negotiators typically aim to maximise their own benefit. However, in the above case, knowing that the other side of the table had an offer from a rival awoke a competitive spirit, sidelining rational judgement and conceding on less favourable outcomes to block the rival from sealing the deal.

“The relationships behind the scenes, not just the numbers on the table, play a huge role in negotiations,” says Kang Hoonie Sanghoon, Assistant Professor of Management at the Chinese University of Hong Kong (CUHK) Business School. “While the value of an alternative offer greatly influences the negotiation outcomes, many may overlook how important the source of that alternative offer can be.”

In a study, Beating the rival but losing the game: How the source of alternative offers alters behaviour and outcomes in negotiation, Professor Kang, along with Julia Hur of New York University Shanghai and Gavin Kilduff of New York University, highlights the unexpected impact of social relationships in shifting negotiation goals. This insight adds a new dimension to understanding negotiation dynamics beyond traditional economic considerations.

“Negotiators come to the table with a strong motivation to get the best deal, but once they learned that their rival is the BATNA for their counterpart, beating the rival at any cost suddenly becomes more important.”

Professor Kang Hoonie Sanghoon

Leveraging alternative offers in negotiations

One crucial factor that shapes negotiations is the alternatives, or what each side can get if they cannot reach a consensus. In negotiation terms, the option outside the current deal is called best alternative to a negotiated agreement (BATNA). A party with a better BATNA usually pushes harder for deals that bring more benefit to itself and ends up with more favourable outcomes.

Imagine an employee negotiating a pay rise with a firm. If they receive a job offer for US$100,000 per year while their current pay is US$80,000, they’ll be in a much stronger position to ask for a rise since their BATNA is higher. In the study, the analyses find that not only the offer itself, but also which firms offer higher salaries, whether rival or non-rival firms, can make a significant difference.

Professor Kang demonstrates this point through a series of experiments in which participants negotiated in various scenarios. In the first two experiments, the researchers asked participants via online platforms to imagine they were negotiating to buy the rights to a movie, and the movie director had an alternative offer from another company. When the alternative offer came from a rival, participants were keen to outdo the rival’s offer and willing to accept higher prices compared to when the offer came from a non-rival.

The third experiment was conducted with business school students from one of the two competing South Korean universities. The participants took a negotiation class and were tasked to recruit an elite basketball player through a scholarship. The participants eventually awarded a more generous scholarship to candidates approached by the rival university compared to those recruited by a non-rival school.

The last experiment was conducted with undergraduate students from a public university in Hong Kong. Participants who took the Business Negotiation class were randomly assigned to either the director or the athlete role. Directors were tasked with recruiting an athlete who had received an offer from another school. Directors negotiating against an offer from a rival university ultimately agreed to give a higher scholarship and were more satisfied with the deal.

“Rivalry forms from the experiences of similarity, repeated competition, and evenly matched contests over time, which leads to competitive behaviours,” Professor Kang adds. “Negotiators come to the table with a strong motivation to get the best deal, but once they learned that their rival is the BATNA for their counterpart, beating the rival at any cost suddenly becomes more important. Therefore, they become less demanding with their terms to prevent the rival from getting the deal.”

How to turn rivalry to your advantage

The study calls on negotiators to be cautious when making any offers. Although there may be benefits to preventing a rival from closing the deal, negotiators should quantify these benefits rather than letting impulses drive their actions.

The researchers also suggest a strategy that leverages rivalry relationships. Negotiators obtaining offers from two rivals may be able to extract substantially higher offers by signalling the offers to both of them without disclosing the exact terms. This tactic can be particularly effective in purely distributive negotiations, where the gain of one party comes directly at the expense of the other.

In an integrative negotiation, where parties collaborate to benefit all, negotiators can achieve greater mutual gains by understanding each other’s priorities and proposing trade-offs. However, when one of the parties has an offer from a rival, the impulse to compete can decrease mutual benefits by hindering negotiators from developing integrative solutions.

Holding back can be a strategic move when a rival serves as the BATNA for the counterpart. Suppose the counterpart makes unreasonable demands, and the negotiator discovers that this counterpart is also in talks with their rival, the negotiator may choose not to concede. Instead, they may wait, hoping that the rival will accept a disadvantageous deal. Although this results in losing the deal, the negotiator may perceive such a scenario as a victory.