Win-Win Bargaining: Private Negotiation, Public Auction, or Both?

Win-win bargaining requires us to choose the right dealmaking process. News stories involving Amazon and Apple highlight the pros and cons of private negotiations, public auctions, and hybrid negotiauctions.

By — on / Business Negotiations

win win bargaining

When Amazon and Apple each began scouting locations for a new campus in 2017, we might have expected them to follow similar negotiating strategies aimed at win-win bargaining. In fact, their searches were very different:

  • Amazon set off a frenzy in September 2017 when it announced it was soliciting bids from cities interested in hosting its second headquarters, known as HQ2. Dangling the prospect of a $5 billion campus and about 50,000 jobs, the e-commerce juggernaut attracted proposals from 238 cities and regions across North America, which it narrowed down to 20 finalists—ranging from Austin, Tex., to Washington, D.C.—in January 2018. In the end, Amazon announced it would split HQ2 between the two most obvious choices, the Washington, D.C., area and New York City. Many accused the competition of being a farce whose only goal was to drum up publicity.
  • On May 23, 2018, the Wall Street Journal reported that Apple CEO Tim Cook had held a secret meeting with North Carolina governor Roy Cooper to discuss the possibility of building a large customer-service facility in the Raleigh-Durham area. Cook’s public schedule for his visit to North Carolina omitted the meeting. Apple had revealed it was planning to open a new campus to house technical support staff but largely kept quiet about the possible location. Three years later, in April 2021, Apple announced it would build a new campus in Raleigh-Durham that would employ 3,000 people in high-wage technical jobs.

When putting an asset on the market, sellers face a choice of negotiation strategies, including whether to negotiate one-on-one with buyers or holding an auction. Amazon gave the appearance that it was holding an auction but, like Apple, appeared to only seriously negotiate with a small number of contenders.

The question of which process to choose—or whether to use a hybrid process known as a negotiauction—is a crucial one for buyers. Drawing on guidance from Program on Negotiation chair Guhan Subramanian’s book Dealmaking: The New Strategy of Negotiauctions (W.W. Norton & Co., 2020, 2nd ed.), we review the most important factors to consider in your own attempts at win-win bargaining.

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Discover step-by-step techniques for avoiding common business negotiation pitfalls when you download a copy of the FREE special report, Business Negotiation Strategies: How to Negotiate Better Business Deals, from the Program on Negotiation at Harvard Law School.

Win-Win Bargaining: Price Competition Versus Value Creation 

In a March 2018 interview with Recode and MSNBC, Cook was asked whether Apple’s search for a new campus would mirror Amazon’s. He demurred: “We’re not doing a beauty contest kind of thing. That’s not Apple.” Cook criticized competitions that put contestants “through a ton of work.” He continued, “You have a winner and a lot of losers, unfortunately. . . . The best thing we can do in business is to find the win-win.”

As Cook suggested, because auctions tend to involve competition on a single issue, price, they can become win-lose contests that crowd out all other issues. Bidders often offer more than an item is worth—and sometimes more than they can afford, a phenomenon known as the “winner’s curse.” By comparison, in negotiation, parties generally have many more opportunities for win-win bargaining by identifying preferences and tradeoffs across issues.

When you hope to build a long-term partnership with a buyer, private negotiation allows more opportunities to build rapport and trust than an auction does. But for one-off deals in which price is the major issue, you might choose to hold an auction instead.

Secrecy Versus Publicity

Sellers may prefer to negotiate rather than hold an auction when they or their potential buyers put a premium on privacy. A public auction can bring unwanted scrutiny and even negative publicity to a seller. Consider that Amazon’s HQ2 race ended with two “winners” and 236 losers. Most communities that poured resources into perfecting their bid likely came to believe it was a waste of time.

Bidder Profiles

When you’re likely to attract multiple enthusiastic bidders, an auction will generate the best price competition, writes Subramanian in Dealmaking. By contrast, if there’s a chance only one or two bidders will show up, individual negotiations would make more sense.

But it’s not necessarily the case that the more bidders, the better. A large auction can quickly grow unwieldy and require significant resource outlays to manage. In addition, a huge auction could scare away high-value bidders who don’t want to play on a wide-open field. For these reasons, in many contexts, the sweet spot to aim for is five to eight bidders, according to Subramanian.

Sellers also need to consider their ability to identify interested buyers. If you would have difficulty identifying high-value bidders, a public auction could bring them out of the woodwork. By contrast, if you already know which companies can meet your needs, you could instead negotiate one-on-one with the obvious contenders.

Finally, when one potential buyer is likely to value what you’re selling much more than other bidders (for whatever reason), you’d generally be better off negotiating privately with that party. Why? If you hold an auction, that interested buyer will need to bid only slightly higher than the next-highest bidder to win the prize—and could get a great deal as a result. You may be able to get much more from that buyer by negotiating privately and anchoring with a high sale price.

How about a Negotiauction?

Sellers may be able to balance different negotiation strategies—competition versus value creation, many versus few bidders—by engaging in a negotiauction. In fact, most real-world sales of significant assets are negotiauctions: They incorporate features of both negotiations and auctions, according to Subramanian.

A negotiauction involves private one-on-one negotiations between the seller and various buyers, as well as one or more rounds of bidding. By borrowing from the best of both worlds—negotiations and auctions—sellers can often get a great deal. Buyers can also try to shape the process, as in the case of an auction contestant who approaches a seller about negotiating privately to move beyond the single issue of price. The result: true win-win bargaining.

3 Other Seller Considerations

When deciding which process to use, sellers should also keep the following concerns in mind, writes Guhan Subramanian in Dealmaking:

  1. Asset specificity. The greater your ability to specify what your asset is, the more conducive it is to being auctioned. By contrast, when an asset is ill defined, negotiation is generally the better route. For example, the U.S. government has had success selling securities, which are homogenous and appealing to many buyers, at auction. But in the aftermath of the 2008 financial crisis, the government concluded that auctioning off toxic assets, which vary widely across a range of characteristics, would be a mistake.
  2. Speed. When you or your likely bidders are in a hurry, you may prefer to hold an auction. By contrast, when you have the time to explore interests, generate options, and create value, negotiation may be a better choice.
  3. Risk. The speed of auctions is associated with greater risk. If no bidders or only one bidder shows up, you may have squandered your ability to get a good price. When you negotiate, by contrast, you can test the waters gradually and move on if it becomes apparent you’re not going to reach a satisfactory deal.

Have you used negotiauctions to achieve win-win bargaining outcomes?

Claim your FREE copy: Business Negotiation Strategies: How to Negotiate Better Business Deals

Discover step-by-step techniques for avoiding common business negotiation pitfalls when you download a copy of the FREE special report, Business Negotiation Strategies: How to Negotiate Better Business Deals, from the Program on Negotiation at Harvard Law School.

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