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Developing Competitive Strategies for Buyer-Supplier Negotiations

By Jonathan F. Bard

Abstract

Using differential game theory, a model is developed to analyze the dynamics accompanying buyer-supplier negotiations. Two cases are examined: the first supposes that the players bargain cooperatively and try to reach Pareto-optimal solutions; the second assumes a noncooperative atmosphere and seeks out Nash equilibria. Although the latter are not necessarily efficient, they do provide a measure of stability, and hence may be considered a conservative strategy. In either case, the buyer and supplier are bargaining over n issues with a view toward minimizing their individual costs. These costs are represented by a linear combination of the terminal offer or bid, and the cumulative losses incurred during the negotiating process. In the analysis, closed form solutions are obtained for a variety of structural and behavioral assumptions. For certain Nash equilibria it is shown that agreement is reached on all issues simultaneously. The results can be used to evaluate the performance of different strategies, as well as check for suboptimality.bargaining, differential games, Pareto-optimality, Nash equilibria, sufficiency conditions

DOI identifier: 10.1287/mnsc.33.9.1181
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