When Negotiators Act Like Parasites

By — on / Negotiation Skills

Adapted from “Creating Values, Weighing Values,” by Max H. Bazerman (professor, Harvard Business School), first published in the Negotiation newsletter.

In April 2001, the FTC filed a complaint accusing pharmaceutical companies Schering-Plough and Upsher-Smith of restricting trade. Upsher-Smith had been preparing to introduce a generic pharmaceutical product that would threaten a near monopoly held by Schering-Plough. Schering-Plough filed a lawsuit accusing Upsher-Smith of violating Schering-Plough’s patent. The companies reached an out-of-court settlement in which Upsher-Smith agreed to delay its entry into the market, and Schering-Plough agreed to pay Upsher-Smith $60 million for five unrelated products.

In its lawsuit, the FTC argued that the $60 million payment was not intended for the five products, but rather to keep Upsher-Smith’s generic product out of the market. In court, the firms’ lawyers argued that the value created by the deal was beneficial to society. The administrative law judge ruled in favor of the firms and against the FTC, arguing primarily that the FTC had not produced evidence connecting the market delay to the $60 million payment. The FTC commissioners overruled the judge, arguing that the competing firms would not have reached the two agreements independently. The FTC ruling treated the agreement as an attempt to parasitically create value at the expense of consumers.

James Gillespie of the Illinois Institute of Technology’s Chicago-Kent College of Law and Max H. Bazerman of Harvard Business School coined the term parasitic integration to describe instances in which the value created by negotiators is taken from parties who are not at the bargaining table. Such arrangements are parasitic because the benefits achieved by negotiators come at the expense of others.

Parasitic integration often occurs when only two or three firms exist in a small industry. In many of the negotiation simulations used in value-creation training seminars, students represent firms belonging to a small market. Through several rounds, each firm must decide whether to charge a high or low price. If firm F charges a high price and firm G charges a low price, G will pick up market share; the low-price firm wins at the expense of the high-price firm. But the parties would be better off if they both charged high prices rather than low prices.

Of course, companies are entitled to charge higher prices through legal coordination. Yet when negotiating, parties should consider whether they are creating societal value in the process or simply helping each other extract as much money as possible from the customer base.

When can we judge value creation to be beneficial to society? One standard would be to call value creation socially beneficial when the value created for the parties at the table exceeds the costs imposed on outsiders. While some of the value created may result from parasitic integration at the expense of others, the overall result is a net increase in value to society.

How can you make this assessment in your negotiations? Ask yourself the following sets of questions: (1) Other than the negotiating parties, who is affected by the agreement? (2) How is each of these parties affected? What is the magnitude of these effects? (3) Do I care about these parties? Should I? (4) How does the impact of the agreement on parties not at the table compare with the impact on the negotiating parties?

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