The bargainers’ objective functions II

To maximize utility TWU Local 100 negotiators should raise the wage demand as long as the marginal increase is an expected utility from the higher wage and exceeds the marginal decrease in expected utility from strike costs. The best wage demand is $1.50 per hour for TWU Local 100 as an initial demand and would determine the starting point for its concessions curve such to land at 99¢.

The MTA bargainers have made the same sort of calculations. The desire to win as low a wage increase as possible must be balanced against probable strike costs necessary to obtain it. Starting from the upper limit of the contract zone the MTA negotiator would compare the additional benefit from a lower wage against the additional strike costs that would be likely to go with it. As the negotiator considers lower and lower wage offers at some point - say when the wage increase falls below that granted by a private sector - the additional utility from yet a lower wage begins to diminish while expected strike costs become quite large. By equating marginal benefit and marginal cost the MTA bargainer would arrive at a most favorable wage demand as the starting point for the MTA’s resistance curve.

Clearly there are important points about the bargaining process. First at the beginning of bargaining a relatively wide distance separates the wage demands of the two sides. There are several factors that account for this - one is that the threat of a strike still lays in the distance and psychologically the bargainers tend to discount the amount of strike costs they would incur. Therefore this reduces the value in each bargainer’s functions leading the TWU Local 100 to demand a relatively high wage and the MTA to offer a relatively low wage. Second at the beginning of the negotiations one or both sides may have an over confidence of expectations about how much the other side will give into without a strike leading to inflated estimates of the variables in each bargainer’s too large demands. This tendency of inflated demands at the beginning of bargaining reflects in part the knowledge of skilled negotiators that it is easier to come down in one’s demands if they are too high than it is to increase one’s demands from too low an initial position. A third reason for the wide distance separating the reaction functions is that at the beginning of bargaining both sides typically engage in demand exaggeration or bluffing. Bluffing is part of the bargaining tactic used by labor negotiations in which one side attempts to alter the other party’s subjective estimates of the benefits and costs of a particular wage in a way that yields a more favorable settlement.