# Frankie Ferrara

6 June 2016

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Q1.

Jewel: estimated benefit of Z1 over Z2 is \$5/unit.
Acme: quoted Z2 CPUs at \$35/unit
Beta: quoted Z1 CPUs at \$38/unit
Condor: only produces Z2 CPUs
a. The BATNA in the negotiation with Condor is to buy the Z1 CPUs from Beta. It is the best alternative considering the \$5/unit benefit of Z1 over Z2 CPUs compared to the\$3 difference between Acme and Beta’s offers.

b. Jewel’s reservation price in negotiating with Condor is \$38 – \$5 = \$33. There’s a 50% chance to negotiate with Acme a \$28/unit with Acme. c. Jewel’s BATNA is to negotiate a \$28/unit with Acme.

d. The new reservation price base on the EMV is \$30.5. 50% \$28 EMV = \$30.5
50% \$33 Condor: Sell to Jewel, 20% chance to sell to one of Jewel’s competitors at \$30/unit or 80% chance to liquidate at \$15/unit. e. Condor’s BATNA is to sell to one of Jewel’s competitors at \$30/unit.

f. Condor’s reserved price based on EMV is \$18.
20% \$30 EMV = \$18
80% \$15 g. SRP = \$18 |————————-ZOPA————————-| BRP = \$30.

h. Considering that condor is risk averse, its reservation price would be 80% x \$ 15 = \$12.

Q2.
Mary put her house on the market for \$215k and the first offer she received is 2 weeks later at \$170k. Mary’s BATNA is this negotiation is to keep the house waiting for another buyer to make an offer or to try to find a lessee to rent the house. Mary’s reservation price depends on several factors including:

The current fair market value of the house

How pressed is she to sell the house (is she selling it out of an urgent need for money?) The prospects of the real estate market (are real estate prices expected to rise?) The current economic situation/mortgage rates (are people willing to buy houses/rent houses?) The daily incurred maintenance/interest costs of not selling the house The current fair market value should be Mary’s first benchmark in determining her reservation price. I assume that the \$215k price she is requesting is higher than the fair market value and her reservation price should be in the range of the fair market value. Depending on the urgency of the sale, Mary’s risk profile, the factors mentioned above and their probability of occurring, the reservation price can go higher or lower than the fair market value. In this specific situation, it is obvious that Mary is willing to negotiate the deal which signals that the initial offer didn’t offend her and that she can negotiate it to an acceptable price for her.

Since she, the seller, gave the initial offer when she put her house on the market for \$215k, it is expected that the negotiation will result in a price closer to the buyer’s initial offer. If she is interested in closing the deal, she should think of setting her reservation price in such a way to achieve a ZOPA. The mid-range between Mary’s price and the buyer’s offer is \$192.5k so she should consider having a reservation price less than this value so that there is a high chance of a ZOPA. In case Mary is not in urgency of selling the house, and the factors mentioned above provide positive expectations, then the reservation price should be at least the fair market value. The probability of occurrence and the valuation of the positive factors can be added to the reservation price as well which in this case decreases the probability of a ZOPA in this deal but provides a fair valuation.

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