the influence of reward magnitude, opening bid and concession rate on profit earned in a managerial...

THE INFLUENCE OF REWARD MAGNITUDE, OPENING BID AND CONCESSION RATE ON PROFIT EARNED IN A MANAGERIAL NEGOTIATION GAME

by Bernard I,. Hinton,l W . Clay Haiixiiel*,2 arid Michael F. PohleiiJ

This paper examines the influence that reward magnitude, concession rate, and opening bid concession have on the payoffs earned in a managerial bargaining game. Twenty-four subjects participated as both buyers and sellers in 18 separate bargaining sessions. The data indicate that the opening bid concession and the concession rate of the bargainer are crucial in reaching mutually rewarding agreements over a period of time regardless of the magnitude of the potential earnings. The implications of the results for managerial bargaining behavior in organizations are discussed.

Dw

ECENTLP therc has bccn considmablc R attention given to the variahlc of reward magnitude as it affects dccision making behavior in negotiation settings. &IcClintock and RIcNeel (1966a; 1966b; 1!367) found that subjects receiving low rcxvards were found to compete more in a prisoner's dilemma (PD) gamc than those receiving high rewards. Gallo (1966) used a modification of the Deutsch and Icrauss trucking game and found that subjects playing for imaginary money lost heavily on the average, whereas subj ccts playing for real money won an avcragc of $4.96 over the course of 20 trials.

Evans (1964) and Wrightsman (1966) found that therc was no difference in the level of cooperation of a P D gamr nhen subjects played for imaginary rewards or when they played for actual rewards. Oskamp and Kleinke (1970) found no differences in the effects that five different reward schedules had on cooperation in a P D gamc'. The last authors even suggest that the prescncr of a higher reward schedule may lead to levels of competition when compared to a lower reward schcdule.

The above studies report conflicting rcwlts concerning the effect that reward magnitude has on bargaining behavior. Also, none of the studies utilized a bilateral monopoly bargaining setting xvhich ii ould

I Indiana University. Michigan State University. University of Delaware.

apprar to haw more application for certain typt3s of negotiation settings found in organizations, e.g., union contract negotiations. The first purpose of this study, therefore, was to cixamine the effect that differences in the re\? ard magnitude have on the opening bid concession, concession rate, and the profit cbarned by subjects in a managerial negotiation gamc. Specifically, it was hy- pothesized that as the reward magnitude increased, the level of cooperation, as measured by the opening bid concession and the concession rate of the subject, would increase.

The second purpose of this study was to investigate the relationship among the size of opening bid concession, the concession rate, and the profit earned by the subjects. Komorita and Brenner (1968) found that the higher a subject started in bargaining, the greater the payoff he received. This finding seemed to imply that if one party enters into negotiations with another, he should always start the negotiations at a lrvel from which he can make fairly largc concessions.

Research findings concerning the relationship bctwern the profit earned and thc concession rate have yielded conflicting results. Support of thc proposal that a conciliatory strategy yields more agrcc- rnmts, yidds a higher payoff, or yields a greater concrssion ratr by opponent has been roported by Bartos (1965), Pilisuk and Skolnick (1968), and Ihmorita, Sheposh, and Brawr (1968). Support of thc proposal

197

Behavioral Science. Volume 19. 1974

that a louer cone ion rate tields highrr earnings has been reported by Chwtkoff and Conley (1967), Chcrtkoff and Baird (197 1) , and Komorita and Barnes (1969). In most of these studies, subjects were playing for imaginary moncy (Chertkoff c\r Conlcy, 1967; Chcrtkoff (6 Baird, 1971), or dse tho offer on thc last trial, rather than the money actually earned, nas the measurc of earnings (IZomorita & Brcnner, 1968; Komorita Barnes, 1969).

Harnett, Cummings and Hamnvr (1973) found in an experiment nhcre suhjccts bargained until they reachcd agreemcmt, that the size of the bargainer’s concession was inversely related to his payoff (T =

-.48, p < .001). They also found that the greater the bargainer’s opening concession, the louer were his profits ( r = -31, 71 < .005>. Hamner (1974), using thr actual earnings as the dependent variable, including zero earnings for those subjects uho failed to reach an agreement, found that the bargainers who had a higher concession rate made more money on the average than bargainers who had a lower concession rat(..

I n the present study, subjects nho fail to reach an agreement in a particular dccision making period nil1 be recorded as having received a zero payoff. Therefor(., it was predicted that as the concession rate increases, the profit of the subject %\ill increase, since more agreements will be reached. It was also predicted that as the magnitude of the concession on the first offer increases, profits of the subjects will decrease since subjects will not have a level from which they can make concessions.

The final concern of this study mas to examine how the combination of the thrw independent variables-rcward magnitude, concession rate, and opening bid concession -affects the earnings of the subjects in a managerial negotiation game. While no specific hypotheses were generatcd, it was felt that these three variables in combination would correlate significantly M ith tho profits earned by t>hc bargainers. A

METHOD Subjects

The 24 subjects were Indiana University Graduate School of Business R1.B.A. candi- dates recruited from graduate classes.

Experimental task In order to test thc assumptions regarding

th(. behavioral bases of managerial decision making in a bilateral monopoly market, an interorganizational market simulation study \\as designed. In this market, the primary cost of acquiring information is rapidly shifting from data processing to data collec- tion. Information can be bought from othw companirs, and as such the sale of such proprietary kno\\ ledgc. 1% ould help the firim recover its sunk costs and might well enhance its profit picture. The cost saving oppor- tunities of interorganizational transfer i d

data and information was the basis of this experimental design.

The experimental setting JT as comprised of a buyer and a seller, each attcmpting lo maximizr his individual rcturn on investment or profit in a fixed sum bargaining situation. Thc setting finally evolved as a two-person gaming situation with con- strained communication patterns.

The market structure described above nas studied by having the participants in the experiment negotiate for the sale or purchase of certain information. Participants in each round of the negotiations were seated a t tables with partitions betwecn them. Communication betmeen buyers and sellers took place only through a “broker” and was limited to information written on preprinted forms. These described the nature of the information needed by the buyer and available from the seller, and the collecticln cost-a cost that mas assumed to have been incurred by the seller and would be incurred by thc buyer if he failed to negotiate a purchase. agreement. To begin each round of the negotiation, the broker passed identi- cal forms to the buyers and sellers. E u - amples of the information contained on the forms arc as follows:

Buyer’s Form You must either collect or purchase certain information concerning new manu- facturing techniques which make economi- cally feasible the application of micro- circuit technology to a wide range of consumer products. This information wiill cost you $90,000 to collect. If this information is available through the broker, u hat would be your bid price? $-.

Behavioral Science, Volume 19, 1974

INFLUENCE OF ILEWAIW ~IAGNITUDE 199

Seller’s Form You have cwllccted arid utilized ccrt:tin information concerning the construction intentions of all major segmrnts of tho construction market for thc next five years, including the owner, location, and type of building intended. This information costs you $55,000 to collect. Assuming you decide to offer this information for sale through the broker, what asking price will you set? $ . The seller’s profit u as the amount col-

lwtcd for the information, hile the buycr’s profit was thc difference between the pur- chased cost and thc actual collrction cost. Bids and counterbids continued for five minutes, m ith time remaining announced over a public address system from a pre- tinled tape recording. At the end of thc allowed time, the broker notified rach participant whether or not a salc was negotiated, the terms of the sale, and the profit, if any, that cach earned.

In order to assure a realistic simulation of a profit maximizing system, the dollar values of the information which lvas ncgo- tiated mere translated into a linear payoff schedule for each subject. The subjects therefore earned real moncy in a direct proportion to the terms of the sale or purchase of information u hich he negotiated, .001 percent of the organization’s profit, i.e., if the profit for his firm was $500,000, his earnings for that transaction was $5.00.

Variables An extremely large numbcr of variables

are presumed to influence any intcmrga- nizational information transfer. Thc ones assumed to have the greatest influence n ere selected for critical study. These includrd : (a) the actual dollar value of the inform‘ ‘1 t‘ 1011

involved, 18 different dollar values were utilized, ranging from S1,OOO to $1,000,000 with corresponding possible earnings ranging from $0.01 to $10.00 for a total joint profit over 18 decision periods of $24.00, (b) the opening bid concessions of the individual decision makers, defined as the amount the subject conceded from maximum on his first bid, (c) the concession rate of the drcision makers, dcfined as the amount conceded from the first bid to thc last bid dividrd

by the numbrr of bids made; (d) the number of hids it took to reach agreement; and (e) thr number of agreements reached.

The drpendcnt variable was the amount of rrturn on invrstment or profit made by thr subjects in each of the 18 decision prriods. In the process of collecting the data, rach dollar value 11 as rotated against rach form of information, and each subject was rotatrd against the other subjects, so that oach individual decision was essentially uniqur. The opening bid concessions, the conccssion ratc, and the amount of return on investment or profit variables were rxamincbd as a percentage of the value or cost of tht. information so that comparability across rmt ard lev& could be made.

RESULTS As indicated previously, we are intercstrd

in the bargainer’s opening bid (OBP), the ratr a t which he concedes (CRP), the number of bids he makes (KOB), the changes in his reward magnitude (RIM), the number of agreements he reaches (NOA), and how thcse values are related to profit as a per- centagc of the reward magnitude (ROI). Table 1 presents the results of the correlational analysis performed between the five indcprndrnt variables and profit earned.

An cxamination of product moment correlations indicates several significant findings. The reward magnitude, while it did not corrclate significantly 1% ith the profit earned (T = -.03, ns), correlated significantly with the number of bids it took to reach agreemrnt ( r = -.ll, p < .05), i.e., the grratrr the rev ard magnitude, the f r t t er bids it took to reach an agreemrnt. An obvious finding reported in Table 1 is that as the number of agreements increased, the profit earned increased ( r = .99, p < .OOl). This mas as rxpected since the subjects nho did not reach agreement in a particular decision period \\ere recorded as receiving a zoro payoff. As the numbrr of bids increased, the total number of subjects reaching agreement in any drcision period increased ( r = .12, p < .01), and therefore the profit increasrd (T = .ll, p < .05). Xotice in TahIc 1 that, as predicted, those subjects who concrdcd at a higher rate per bid earned more profits than subjects who conceded at a lonrr rat(. per bid ( r = .12, p < .01).

Behavioral Science, Volume 19. 1974

200 BERNARD L. HINTON, w. CLAY H A N N E R , AND 3rICHAEL p. I’OHLEN

Rewltrd magnitude with percentage of profit earned

Contrary to our expectations, Tablv 1 indicates that neither the re\$ ard niagnitude or the opening bid concession is rc2lated to the profit earned (T = -.03 and - .OG, respectively). Bcforc rejecting our hypothc- scs related to the rclationship hctu (wi thc opening bid coriccssiori and thc profit varn(ld, and between the r m ard magnitudc and profit earned, it is nccvssary to see if pcirhaps cithcr of these variablvs acts in cornhination u ith another bargaining variable to significantly effect profit earned, i.e., docs eithcr of these variablw havc a suppression clffect on profit carncd? A supprrmor variable is one that has an extremcly Ion correlation with the critcrion, and a high correlation with another predictor hich is highly corrclated \\ ith thc criterion.

Tablc 2 reports the partial corrchtional analysis shou irig the relationship bctu (’(TI reward magnitude and profit earned for the 432 decisions. Since there arc no significant correlations betuwn reward rnagnitudc arid

-

profit earned, even ~ i t h the effect of all other bargaining variables held constant, we must conclude that reward magnitude has no affect, either alone or in combination with other variables on the amount of profit clarned.

Table 3 presents the results of the partial corrtlational analysis showing the relatiori- ship between the opening bid concession and profit earned. By partiallirig out the number of agreeinrrits reached arid the conccmion rat(., it 11 as found that the correlation between thc opcning bid concession arid profit varned is highly significant (1. =

.59, p < .001). We must conclude therefore that as the opcning bid concession of the suhjvcts increases, the profit earned by the subjects nil1 increase, all things being equal.

Thc. final concern of this study mas to cixamine how thc reward magnitude arid th(. opening bid conccssion in combination with the concession rate corrclated nith the profits earned by thc bargainers. Tabk 4

controlling for:

NO.\, Nan, CRP -.n7 NOA, NOB, o m -.n7 NOA, CRP, OBP -.n3 NOR, CRP, o m .no

TABLE 1 S U M M IRY COR1tI;L \TION M ITIZIX FOR B i R G I INING v \ R I d H L C S (x = 432)’

- - ~-

RM NOA Non CRP OBP ROI

controlling for:

NOA, XOB, CRP, o w -.n3

Reward magnitude (RM) 1 . 0 -.ni - .11** -.ni - . n i -.n3 Number of agreements rearhed (NOA) 1.0 .1zt . nz . ni .99: Number of bids (NOB) 1.0 -.n5 .06 .11** Concession rate (CKP) 1.0 - ,971 . 1 z t Opening bid IOBP) 1.0 --.a Profit enrned (ROI) 1.0

* Since there were no significant differences in the behavioral responses of the subjerts when they were buyers as compared to when they were sellers, the combined results are reported.

* * p <.n5. t p < .01. 1 p < mi.

order partial

First order partials

Second order partials

.n3

crmtrolling for:

NOA - .n7 NOB - . n i CRP -.nz OBP -.nz

i,ontrolling. for:

NOA, N o n -.n7 NOA, CRP -.n7 NOA, OBI’ -.n7 NOB, CRP - . n i

CRP, ORP - . n i NOB, OBP -.01

-

I Third order partials I Fourth order partial

* Profit is based on the percentage of ret.urn on investment.


INFLUENCE OF REWARD MAGNITUDE 20 1

controlling for:

RM -.06 NOA - .24*

CRP . 1 7 * NOB - .07

TABLE 3 P A R T I l L C O R R E L I T I O N ANILYSIS S H O W I N G T H E I t I S L . \ T I O N S H I P ULTM ICl<GN O P E N I N G B I D (OBP)

controlling for: RM, NO.\ -- .21* RM, NOB - .07 RM, CRP .17*

NOA, CRI' 59* NOB, CRI' .16*

NOA, N o n - . 2 3 *

Opening bid with profit earned

contrnlling for:

RM, NOA, NOB - .24* RM, NOA, CRP .59* RM, NOR, CRP .16* NO.\, NOB, C R P .58'

~ _____

Zero order )art ial

controlling for:

Rbl, NOA, NOB, CRF .59* -.06

AND PROFIT EIRNICD (LtOI), N = 432 _ _ ~-

I I I

Fi:l$jtr Second order partials Third order partials Fourth order partial

* p < ,001.

TABLE 4

CONCI.:SSION RITE (CRP) \ N U PINIFIT EARNED (ItOI), 12' = 432 P \RTI LL C O R I t F , L i T I O N AN \LYhlh s H O M I N 6 T H t I t L L \ T I O N S H I P MI,T\\ I.,"

Cnncession rate with profit earned

* p < .01. ** p < ,001.

reports the

Zero order ,artial _ _

.12'

~

First order partials

controlling fo i

RM .12* N0.1 .38" NOB .12* OBP ,17**

Second order partials

controlling for: RM, NO.\ .39** RM, NOB . 12* RM, ORP .19" NOA, NOB .39** NOA, o m .w* NOB. o w . ig**

partial correlational analysis showing the relationship between concession rate and profit earned. Notice that the reward magnitude when held constant, has no effect on either the correlation between opening bid concession and profit earned, Table 3, or between the concession rate and profit earned, Table 4. However, when the number of agreements are partialled out, the concession rate is significantly relatcd to the profit earned ( r = .38, p < .001). Also, as we found in Table 3, the findings in Table 4 indicate that if we know the value of the number of agreements, the opening bid concession, and the concession rate of the bargainers, we can explain 41 percent (T = .64, p < .OOl) of the variance in our bargainers' profits.

DISCUSSION AND CONCLUSIONS

Our findings indicate that there is no difference in the level of cooperation as measured by the rate of concession and the

Third order partials

controlling for:

RIM, NO.+, NOB .39*' RM, NO.\, OBP .61" RM, NOB, OBP .19** NO.+. NOB. o w .F$**

-

Fourth order partial

controlling for:

RM, NOA, NOB, OBP .64**

opening bid concession in a bilateral monopoly bargaining game when subjects' reward magnitude varies. Liliewise, there is no diffcrcnce in the percentage of profits earned when the reward magnitude varies. These findings, when combined with those of Evans (1964), Wrightsman (1966), and Oskamp and Klienkc (1970) suggest that the bargaining behavior of subjects is fairly constant across reward schedule.

We found that as the concession on the opcning bid increased, the profits earned decreased when the effect of the number of agrccmrnts reached n-as held constant (1' = - 2 4 , p < .001). This finding is consistent with that of Komorita and Brenner (1968) who found that the higher a subject started in bargaining, the greater the payoff he receivcd. Since they used the last offer as a mcasure of payoff, it has thc same statistical effect as holding tht. number of agreements rcachcd constant. Eon-ever, n hen the numbcr of agrcemcnts reached and the concession

Behavioral Science. Volume 19, 1974

202 BERNARD L. HINTON, w. C L A T HAJINEK, ASL) i \hCHAEL F. POHLEN

rate of the subject are held constant, the opening bid concession is positively correlated \\ith the profit earricd ( r = ..is, p < .001). This may indicatc that, since

on the first bid concede lcss on thc remaining bids (T = -.97, p < .OOl), those \tho reach an agreement earn more profits than subjects who vpcn with a lower (wIieession on the first bid.

As n e predicted, subjects who conceded a t a highcr rate carried more money than subjccts hfho conceded at a lower ratc ( r = .12, p < .001). While this firiding is contrary to that of Chertkoff arid Conlry (19G7), Chertkoff and Baird (1971), Ko- morita and Barnes (1969), arid Harnctt, Cummirigs and Hamner (l973), it is consistent nith that of I'ilisuk arid Skolriick (1968), Komorita, Sheposh, and Rravrr (1968) and Hamner (1974). The diffrrence in these two groups of studirs swms to be that in the first group the c~xpvrirnrntal setting was one of low pressure to reach agreement-subjects bargained until t h (y rrached agrcement or else the last offer was ustid to projcct the profit. In thr: second group the cxptsrimcntal setting was one of high pressure to reach agreement -subjects had a time limit or received a penalty for taking too much time.

The thrw bargaining variables which smm to dctcrniinc thc amount of profit carried \\ cr(i the number of agreemCmts, the opening bid conccmion of the subject and th(1 suh- ject's conccssion rate. It is obvious that the subjects ho reach agreement (barn more money. However, n hen this variable is held constant, the significance of the opening hid concession and thc concclssion ratr can rradily be wen. Our results sorm to indicate that a bargainer should activdy coopc.rate 1% it h his bargaining partner by cithcr making a fairly sizcablo coriccssion on thc opening bid, or by having a reasonably high concession ratc during the negotiation period.

In situations u here the tmrgainer I\ ill continue to bargain n ith thc samc opponent or group of opponents in futurr transactions, e.g., a marlict situation or mar iagm~nt- union negotiations, this policy should lcatl to more agreements arid thrrrforci bcttcr agreements for both parties.

subjects who open with a higher concL,, '5Slo11 '

Since this is one of the first studies, if not t'he first, to test bilateral monopoly bargaining with repeated trials, it will be ncccssary to replicate this study utilizing diffcrcnt subjects arid diffcrent bargaining tasks. Our findings indicatn that the opening bid and thc conccssion rate of the bargainer is crucial in roaching mutually rewarding agroemcnts over a period of time regardless of thc magnitudc of the potential earnings.

REFERENCES Hartos, 0. J. Concession-making in experimental

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Chertkoff, J. M., & Conley, M. Opening offer and frequency of concession as bargaining st,rategies, J . pers. SOC. Psychol., 1967, '7,

Dent,sch, M., I% Krauss, 11. M. The effect of threat upon interpersonal bargaining, J . abnorm.

JSvans, H. Effects of unilateral promise and valiie of rewards upon cooperation and trust, J .

Gallo, P. S., Jr. Effects of inereased incentives upon the use of t.hreat in bargaining, J .

IIamner, W . C. Effects of bargaining strategy and pressure to reach agreement on behavior in a stalemated negotiation, J . pers. soc. Psychol., 1974, in press.

IIarnett,, I ) . L., Curnmings, L. L., & Hamner, W. C. Personality, bargaining style, and payoff in bilateral monopoly bargaining among European managers, Sociornelr y,

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McClintock, C. G., & McNeel, 8. P. Reward and score feedback as det.erminants of cooper:i- tive and competitive game behavior, .7. pers. SOI'. PsyehoE., 1966, 4, 606413. ( a )

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Behavioral Science. Volume 19. 1974

INFLUENCE OP REWARD MAGNITUDE 203

nants of cooperative and competitive game

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