THE MARKET AS NEGOTIATION.

• Author: Hollander-Blumoff, Rebecca

INTRODUCTION 1258 I. MARKETS AND THE LAW 1260 A. What Markets Do 1260 B. How Markets Work 1264 C. The Construction and Regulation of Markets Through Law. 1267 II. THE THEORY OF NEGOTIATION IN MARKETS 1270 A. Negotiation and the Market 1270 B. Key Differences Between Market Theory Predictions and Negotiated Reality 1272 C. Negotiation Effectiveness 1274 1. Strategy and Tactics 1277 2. Individual Differences 1278 3. Training 1281 4. External Bias 1282 III. NEGOTIATION VARIANCE WITHIN MARKETS 1285 A. Characteristics of the Transaction Subject 1286 B. Structure of the Market 1287 C. Norms and Practices of the Market 1289 IV. NEGOTIATION VARIANCE AND THE LAW 1290 A. Negotiation and the Common Law of Contract 1291 1. Requirement of a Bargain 1291 2. Parties' Ability and Capacity to Negotiate 1293 3. Structure of the Market 1295 4. Nature of Relationship and Conduct Between Parties 1296 B. Regulating in High-Negotiation Variance Markets 1300 1. Market for Lawsuit Settlements 1300 2. Market for Corporate Control 1305 3. Market for Employment 1313 CONCLUSION 1316 INTRODUCTION

Negotiation--the essence of capitalism. There's nothing like it. (1)

Markets are the engine of our economy. Rather than distributing goods through a command-and-control system, we rely on markets to direct property, goods, and services to their most efficient use. Although the superiority of markets as distribution devices was at one time the subject of intellectual debate, (2) today markets are so ingrained in our system that they are almost invisible. And their domain continues to grow--more and more items that were thought as personal, private, or not fit for markets are now coming under their aegis. (3)

The market is also ubiquitous in legal scholarship. The basic law and economics models are premised on the notion that markets are the best way of facilitating the exchange of goods and services to achieve the highest level of societal efficiency. However, the idea of "the market" is often discussed as a monolithic entity--something of a black box. As long as certain assumptions hold, such as perfect information, rational actors, and zero transaction costs, the parties will put their potential transaction into the "market," and the market will in turn determine the appropriate price and terms for the exchange. (4) But the market is not an entity in and of itself; it is instead a set of transactions between different parties with respect to particular goods or services. The market price is simply the average of the prices--or even the latest price that one party has decided to pay the other. (5) And that price is arrived at through negotiation.

This Article interrogates the idea of the market as a "black box" by thinking more deeply about markets as negotiations. It examines how markets are structured and how negotiations play the central role in the working of the market. It also examines how law plays a role in shaping those negotiations, for better or worse. (6) Along with common-law contract law's treatment of negotiation, we also look at specific examples of market construction through negotiation rules: the market for legal settlements, the market for corporate control, and the market for labor. In these examples, we discuss the effects of negotiation variance in these markets and whether the law has taken this variance into account.

Part I explores the structure of markets within our economy, and the legal system's role in constructing markets. Part II highlights the ways in which some markets are merely amalgamations of individual negotiations, and then explores more deeply the factors that impact negotiation, focusing largely but not exclusively on negotiation effectiveness. This Part examines the contours of negotiation skill and its distinct nature as compared to the law and economics model of the market, such as rationality and information asymmetry. Part III provides an initial taxonomy of negotiation variance within markets to determine which types of markets allow for significant negotiation effects. Finally, Part IV discusses the role of negotiation in contract law generally, as well as three particular markets: the market for legal settlements, the market for corporate control, and the labor market. It teases out the importance of negotiation to each of these markets and discusses how negotiation variance may play a role in shaping transactions. Ultimately, we must acknowledge and understand the role of negotiation in order to manage its effects and redress the imbalances it can cause.

1. MARKETS AND THE LAW

   Our economic system of distribution and exchange is based primarily on the concept of markets. This Part explores what markets do, how they work, and how law shapes their structure and processes.

   1. What Markets Do

      Markets have a variety of definitions, depending on the purpose of the characterization and the methodology used in developing it. The earliest conception of a market was a physical place where commercial exchange took place. (7) But over time the "marketplace" evolved from a location to an understanding of the transactions that took place within that space. (8) A market could be described simply as a set of transactions that can be coherently aggregated together. (9) In the abstract, the concept has intuitive meaning, at least for those who have participated in a variety of markets. (10) But the concept can be used to describe the basic phenomena from multiple different angles. A market is both a set of buyers and sellers for a particular good, service, or property right, as well as the series of exchanges between these buyers and sellers involving these goods, services, or rights. (11) The term also describes the legal, social, and economic structures that facilitate those exchanges. (12) A particular market can be defined by the types of goods or services it covers, or in terms of geography, time, or kinds of participants. It may encompass an entire economy, or be limited to one specific good.

      The key to a market is the transaction: the exchange of one thing for another. Markets allow for the exchange of goods, services, and other things of value between parties. (13) Because the nature of trade is to exchange non-similar items, there is a commensurability problem: the parties must judge whether the one item (or set of items) should be traded for the other. For this reason, most markets operate not on a barter system, but on a sales system in which money is exchanged for a good or service. (14) Money addresses the commensurability problem by creating a common unit of exchange that can be applied in a variety of contexts. (15) This common unit of exchange also allows for the development of a common numerical value--a price--that indicates the amount of commensurable value necessary for the exchange to take place. To the extent that comparable things of value have been sold within a certain period of time, there may be said to be a "market price" for hypothetical sales of similar things. (16)

      Markets are thus a way of distributing the resources of a society to various participants in that society. (17) They are contrasted with other systems of distribution, such as economic firms, government fiat, or tribal partitioning. (18) As F.A. Hayek argued in The Use of Knowledge in Society, "[I]n a system where the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan." (19) Because each individual buyer and seller in the market will look to match price against their expected utility, transactions will only take place if both parties think they will be better off for it. In this way exchanges are guaranteed, in theory, to be Pareto efficient; both sides expect to increase their utility as a result of the transaction. (20) Because individuals would not contract otherwise, the price will aggregate Pareto-efficient transactions and will facilitate the appropriate distribution of precious resources. (21)

      This system of voluntary exchange forms the cornerstone of modern economic theory. The ever-familiar graph of supply and demand curves illustrates the equilibrium point at which a buyer's demand for a particular good will intersect with the seller's supply. (22) The maximizing behavior of both sellers and buyers will result in a stable equilibrium, if conditions hold. (23) And this equilibrium results in a maximization of social utility. (24) Market equilibrium ensures not only that the appropriate amount of a particular resource is produced, (25) but also that the good is optimally distributed to individuals within that society. (20) Under mainstream economic principles, markets provide the best method for engaging the productive capacity of the nation and distributing the nation's resources to its inhabitants. (27)

      Of course, this is economic theory. In real life, almost every market fails to meet these required conditions for the efficient market hypothesis to hold true; these conditions are idealized and are never met in totality. Concern over the failure of reality to meet theoretical specifications has driven much of the law and economics scholarship of the last half century. The Coase Theorem, which initially may seem to counsel that parties will always bargain for an efficient result no matter the existing legal rule, is actually an explanation of why transaction costs will prevent this from happening. (28) Even if parties would bargain to reach the best result in a frictionless world, the world has a lot of friction. Coase set out this description of transaction costs:

      In order to carry out a market transaction it is necessary to discover who it is that one wishes to deal with, to inform people that one wishes to deal and on what terms, to conduct negotiations leading up to a bargain, to draw up the contract, to undertake the...