Week 5: Supply & Demand, Patent Wars & Negotiations

Stanford GSB Sloan Study Notes, Week 5, Summer quarter

Pages assigned for reading: 339

MGTECON209 – Statistics & Economics (prof Oyer)

  • 4/5 cars sold in China in 2011 were to first time buyers.
  • Economists generally study people’s wants, rather than needs.
    • For added confusion, in wealthy countries calling something a “need” is often a value judgement.
  • Talk is cheap because supply exceeds demand 🙂
  • 800(!) occupations in US require a licence issued by local/state/federal government – thus meddling with supply.
    • In 1950s <5% of workforce, >29% in 2008
    • 40% of workers with post-college education also need a licence to work in their field
  • Price sensitivity is a concept, elasticity a mathematical term expressing it
  • Simplifying the elasticity formula
    • (% change in quantity / % change in price) = (change in Q / Q) / (change in P / P) = Slope of Demand/Supply function * (P/Q)
    • important that plugging the slope only works if the graph was drawn the “right” (e.g the unintuitive economist way) where quantity = X axis
  • Elasticity is negative over a products own price, yet positive over direct substitute’s price

POLECON239 – Strategy Beyond Markets (prof Jha)

  • Quite an evil negotiation technique from Qualcomm case (can’t find the specific SM-111 one online, but there are others):

[…] To protect its patent portfolio, QUALCOMM countered with a plan to spin off its chip business, together with a minor portion of the CDMA patent portfolio, into a separate company referred to as “Spinco”. Spinco could then comply with royalty-free cross-licenses of the CDMA and GSM patents, as the licensees desired. However, since the bulk of the CDMA patents would remain with QUALCOMM proper, the licensees would still have to reside with QUALCOMM, and since the new lightened QUALCOMM wouldn’t be making any chips, it wouldn’t owe any royalties for GSM or WCDMA technology and there would be no cross-licensing opportunity. QUALCOMM invited the licensees to resign before the spin or after, but let them know that the royalty rates after the spin couldn’t be assumed to be the same. In July 2000 QUALCOMM registered for the IPO of “QUALCOMM Spinco, Inc.”

Nokia and QUALCOMM worked out a new cross-licensing agreement in July 2001 that conformed to the typical QUALCOMM royalty structure. After that, all significant wireless manufacturers had signed patent licenses for CDMA and WCDMA with QUALCOMM – Ericsson, Lucent, Nortel, Motorola, Hitachi, and Samsung. QUALCOMM announced the withdrawal of its Spinco plans on July 24, 2001.[…]

  • The reason why regulation, licensing, etc tend to protect more established interests (and block/slow newcomers) is very simple: regulators can not protect interests that do not exist (yet)
  • There is a strong proven positive correlation between number of steps required to create a business in a country & that country’s position in world corruption indexes
  • Note to self – need to go a finish Tim Wu’s The Master Switch: The Rise and Fall of Information Empires (hat tip to Daniel who recommended it first years ago). Few chapters included in our course on FM/AM radio format wars & rise of television tech were a good teaser.

OB289 – Negotiations (prof Neale)

  • Separate your specific interests in a negotiation from the possible solutions of reaching them. Getting a discount is not the only solution option for paying less money.
  • Develop your best alternative to a negotiated agreement (BATNA) in parallelto negotiation itself.
    • First, it usually doesn’t exist yet (bluffing!), but the stronger and more real it actually is, the stronger your power in original negotiation.
    • Once it is good enough, maybe you can skip the negotiation after all?
    • BATNA must be a reality, not something the negotiator wishes
    • Attacking the other side’s BATNA is a common negotiation tactic – expect data intended to make your’s look worse too
  • Winner’s curse: when a negotiator opens with a bid that gets immediately accepted.
    • seller accepts an offer when the goods are least valuable to acquirer
  • When developing bundled issue packages for negotiation, they should each roughly add up to the same value for negotiator
  • Most people are risk-seeking when avoiding losses and risk-averse when ensuring profits (Kahneman & Tversky 1979).
    • As one effect, if a negotiations team is instructed to “minimise their losses”, they get into much more risky bargaining mode than when asked to “maximise the gains” (Neale & Bazerman, 1991)
  • Distinguish between final deadline (only the shortest of sides counts) and time related cost (expense of negotiations dragging out indefinitely) and time horizon (the time between agreement and consequences, esp burdens of it in the future – the longer, the better the deal).
  • Research shows that final agreements are more strongly influenced by initial offers than the subsequent behaviour of the opponent.
    • If the initial offer is too extreme, you need to re-anchor – rather walk away than negotiate with an unacceptable starting point.
    • Don’t legitimise an unacceptable initial offer by making a counteroffer
  • A case where two blocks down the road another shop would give $30 discount on a) a $50 watch or b) $800 video camera
    • subjects consistently take the bother to go there on a) and not on b)
    • background calculation into a percentage value on total price is actually irrational. it should only matter if $30 is worth your time and effort to switch stores.
  • A tendency to take or avoid risk is one of the first factors people think of in describing someone’s personality, most people are actually not consistent in their approach to risk. (think a professional gambler being careful about their health) (Slovic, Fischhoff, Lihtenstein)
  • Framing the negotiation
    • most common reference points: visible anchor (status quo) or an invisible one (expectations)
      • it is surprisingly easy to modify what people include in their status quo
    • Owning something changes your relationship to it, giving it up in a transaction is psychologically processed as “loss”
      • buyers and sellers have a naturally different frame (pay attention to the one’s you’re not)
  • Vivid, memorable presentation of the same information proven to drive measurably better negotiation results than dull presentation of same facts
    • Experiment: 86% vs 42% winning verdict test with jurors + higher monetary awards on top
  • Trick to compensate for overconfidence: ask people (including the negotiations opponent) to explain why their decisions might be wrong or considerably off the mark
  • Three need-based illusions in negotiations: superiority, optimism and control
    • People tend to enter negotiations assuming success and they develop just one strategy accordingly (no natural room for adaptiveness built into the strategy, no search for new information to disconfirm their plan, etc)
    • Complete success in negotiations is not a reasonable goal
  • Expertise can be distinguished from just experience by
    • ability of an expert to adapt their skills, for good outcomes even in face of new demands
    • ability to transit or transfer these skills, to other people not just other situations
  • Experiments with listing prices have shown that the more precisely they are set (1,458,231 vs 1.5M) the higher final closing price they yield
    • Precise listing price -> more accurate -> perceived to be “more objective” (“they must’ve really calculated to get to this accuracy!”) -> less negotiated
  • Some thoughts on making the first offer
    • When you are well prepared, you might want to receive the first offer (small anchoring, large informational effect)
    • Encourage a poorly prepared counterpart to make the first offer (understand & take advantage of their beliefs and mistakes)
    • Poor preparation means least resistance to anchor (you have no data to disagree on)
    • When both parties are well prepared, make the first offer to capture whatever uncertainty exists
    • Best first offer is “just this side of crazy” form your opponents perspective 🙂
  • In a negotiation team, dedicate one member to be the information monitor / listener
    • Also, re-ask questions you’ve researched ahead to verify your understanding
  • In cross-cultural negotiations
    • there is a higher probability that there are different/complementary issues sides value more
    • this has the potential to increase the total value created for both sides as the sum
    • … but due to cultural barriers these issues/priorities are harder to figure out (guess or research)
  • Negotiating “easy issues first” is a bad strategy
    • doesn’t enable bundling easy issues with hard ones
    • inevitably leaves with hard-issues-only (and intimidation) in the end
    • people do this as it creates short term feel-good and momentum

For more posts on the Stanford GSB Sloan life – click here to search by tag “sloan”.