Good negotiation, says conventional wisdom, involves holding out for the best deal, counteroffering, or driving a hard bargain.
But research by Stanford’s Bradley Larsen, Stanford PhD student Carol Hengheng Lu, and Chicago Booth’s Anthony Lee Zhang suggests otherwise, at least if the primary objective is to make a deal. They find that when negotiations are mediated by third-party brokers, success is actually tied to getting the deal done as quickly as possible.
The researchers studied the issue through the used-car market in the United States, which was big business even before the global semiconductor shortage sent prices through the roof. Auto dealers, fleet operators, and leasing companies trade more than $80 billion worth of vehicles in wholesale auctions every year, with thousands of autos changing hands on any given day.
The stakes can run high, particularly for smaller used-car dealers trying to optimize inventories and profit margins. But it’s an imperfect system. All cars are subject to rapid-fire, 90-second auctions that often fail to result in a sale. When that happens, auction houses name an intermediary to help broker a deal between the seller and the highest bidder.
The researchers analyzed more than 80,000 mediated bargaining sequences with locked-in buyers and sellers from six major US used-car auction houses. The data, from 2006 to 2010, contained comprehensive information, including the identities of all parties and all actions—offers, counteroffers, deals, and no-deals—related to each negotiation.
Kicking the tires on mediators
In business-to-business used car sales, the right mediator made a big difference in the probability of a deal being reached.
To isolate and determine the role of the negotiator, they stripped out external factors that could influence the outcome, such as time and day of the week, the seller’s track record or background, and the model and other characteristics of each vehicle. They were then able to compare negotiations and negotiators to assess their impact on the probability of trade.
A good mediator can significantly raise the chances of closing a deal, they find. Mediators in the 75th percentile according to performance were 22 percent more likely to broker a deal than those in the 25th percentile, the researchers calculate. Mediators negotiated more money for sellers than the top bid while getting a break for buyers from sellers’ undisclosed reserve prices.
Successful intermediaries were most effective at nudging sellers and buyers off their preconceived pricing limits, according to Zhang. “The third party’s job is to somehow get both players to back down enough to find a mutually acceptable price and have them move on to an agreement,” he says.
To determine what the successful intermediaries were doing differently, the researchers looked at the successive rounds of negotiations in each individual case. They discovered that in 66 percent of the deals made, brokers were able to get their sellers to accept the first price at the first round of negotiation. With the unsuccessful negotiators, sellers only accepted the first offer 34 percent of the time.
Thus, the best mediators were more adept at getting sellers to back down and agree more quickly, whereas the others encouraged clients to hold off and push back. Dragging things out didn’t help, the researchers find. The average bargaining thread lasted just 1.37 rounds and ended after six hours, they write.
Their findings could have ramifications for a range of real-world bargaining situations—among countries, businesses, investors, consumers, or litigants. “Third-party mediation is really common in a range of bargaining settings in industry, from used cars to real estate and beyond,” Zhang says. “People use mediators because negotiation is itself a bit of an imperfect sport.”
Mediators, the researchers observe, “are often at the center of massive transactions,” such as investment banks handling giant acquisitions and lawyers working out pretrial settlements. The analysis demonstrates the value of mediation, says Zhang, as well as what works best, which he says is “getting your seller to accept the price fast and up front.”
Courtesy Booth Chicago Booth Review/By Áine Doris