Article The “Anchor Effect” on Price Negotiations, 1219 UTBJ, Vol. 32, No. 6. 24

Author:Richard A. Kaplan
Position:Vol. 32 6 Pg. 24
 
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Article, The “Anchor Effect” on Price Negotiations

Vol. 32 No. 6 Pg. 24

Utah Bar Journal

December, 2019

November, 2019

Richard A. Kaplan

In a talk he gave several years ago at Columbia Law School, Carl Lobell, principal outside counsel for GE Capital for more than thirty years, told the audience about conventional wisdom on negotiating price: “When you get to the issue of price, don’t be the first to talk about it. You can only lose. If you’re the seller, the price you suggest can only go down. If you’re the buyer, the price you offer can only go up.” He added that everyone at the table knows these dynamics. The buyer is well aware that the typical seller starts by proposing an inflated price the seller knows he or she will never get. The seller knows that the typical buyer starts by offering a lot less than he or she is prepared to pay. If they do reach a deal, the price will end up somewhere between these extremes, depending on the negotiating skills of the parties and the alternatives available to them, including whether one of them makes clear he or she is content simply to walk away.

Mr. Lobell’s comments were in the context of mergers and acquisitions, where price is certainly a significant consideration to both sides but is only one of many terms to be negotiated. Does it follow from his observations that the parties should avoid making the first move on price in a single-issue negotiation? Many lawsuits ultimately boil down to a single question: how much the defendant will pay? In that context, does going first make a difference? Or will the outcome be essentially the same regardless of who starts the discussion or at what amount? Worse, is it an economic mistake to go first? Or can going first actually improve the economic outcome in the asking party’s favor? The answer to these questions is, of course, it depends.

This article begins with a discussion of how ordinary transactions occur and then turns to negotiated lawsuit settlements. In many common transactions, the seller begins negotiations.

“One-Off” Negotiations Over Sale Price

Suppose, for example, you are an individual looking to sell something you own – a “one-off” transaction. It could be a house, a used car, artwork, a table, a lamp, or any one of the thousands of consumer items we have in our homes or in storage. In that situation, you are participating in a competitive marketplace where it is customary that the seller sets the starting or list price. While there are certainly other significant factors not relevant here, buyers shop in such marketplaces based in large measure on knowledge of the price. If the seller didn’t publish his or her price, it would be nearly impossible to attract a potential buyer.

The sale of unique, rare, or one-of-a-kind items may constitute an exception to the norm that sellers begin the negotiation. Certainly, silence as to price might generate buyer interest and eventually offers from collectors or other persons with the gusto to purchase such an item. But these types of luxury items tend to be listed with galleries or auction houses, and typically these institutions list an expected price range for an item, rather than leaving it open to the...

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