It’s common to think of negotiations and auctions as two distinct forms of deal-making.
In a negotiation, a buyer and a seller struggle over terms, whereas in an auction, buyers compete with each other without any input from the seller.
But the truth is, most deals are made by a combination between these two forms, with both “across-the-table” and “same-side-of-the-table” competition.
Harvard Business School’s Guhan Subramanian has a new book on the subject, which he recently discussed for Harvard’s Working Knowledge blog:
One defining feature [of a negotiauction] is that there are only a few “process takers” (the fence contractors, in my example). If there are more than three to five process takers, it’s hard to have meaningful negotiations with each, and it starts to look more like a full-blown auction.
Another defining feature is that there are multiple interests—in the fence example, price is important but so are quality and timeliness. A third feature of a negotiauction, and maybe the most important, is that the process is unclear. Are you going to go back and forth five times among the contractors to get the best possible price? Or does each contractor get just one chance to put a best offer on the table?
In a typical auction, like what you might see at Christie’s or Sotheby’s, the rules are very precise. But in a negotiauction, the rules are never perfectly pinned down, which creates both opportunities and challenges. Sophisticated dealmakers are able to take advantage of the ambiguity to shape the game to their advantage.
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