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University.

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Barry Nalebuff
I've promised that this course will help you be a better, smarter, more
strategic negotiator. To do that, we begin by laying a foundation for
negotiation, a theory of the “pie.” Over the years, I’ve discovered even the
most experienced negotiators tend to lack a framework that grounds their
approach to negotiation. While some folks try to bully their way to a larger
share, most people make arguments that sound fair to them. But what sounds
fair to them often doesn’t sound fair to the other side. Their criteria for what's
fair may be biased in their favor. The theory of the pie is useful because it
doesn’t depend on which side you are taking. It provides principles that will
change the way you approach negotiations—in this course and in life. It will
allow you to make arguments that persuade others. That’s why I am teaching
you about it first.

Less

Introduction / What is the Pie?

Welcome

Start Lesson

Introduction to the Course

4 min

Course Outline

Requirements and Grading

FAQ

Recommended Books

A Framework for Negotiation

What is the Pie?

6 min

Takeaway

Airline Cost Sharing

10 min

Practice Quiz: Baltimore
1 question

Limo Ride
5 min

The Principle of the Divided Cloth (a historical context for how to

divide the pie)
5 min

Sea Corp
12 min

Looking Ahead

The Shapley Value

Caution: Math Ahead

The Shapley Value (solving the runway problem)

16 min

Practice Quiz: Detour
1 question

Nucleolus (advanced and very much optional)

Course Outline

This is an introductory course. I don’t expect you to have any prior experience
with negotiation, aside from what you have navigating life. The material is
based on the core course I teach to first-year MBA students at Yale. This is
the first course they take, so there are no prerequisites. I’ve tried to make
this online course as similar as possible to the experience you would get at
 Yale. There are several cases for you to negotiate, plenty of practice
problems, and a unifying theory. The course is serious—I haven’t watered
anything down when bringing the material online. There will be some algebra,
but I wouldn't consider the course math-heavy. My goal is to create a course
that will change the way you see the world and reward the effort you put into
it.

What follows is a brief overview of what I hope to accomplish in each of the

course’s seven modules. But before turning to the content, I have a few tips
that may help you navigate this course

 The videos often build upon prior material. Especially in the first two
weeks, things will make more sense if you watch the videos in order.

 Depending on your familiarity and comfort with the material, you might
choose to watch some of the videos at 1.25x speed. I still recommend
watching the negotiation reenactments at regular speed. Otherwise, you
may miss some of the more nuanced behavior. The speed control is found
under Settings at the bottom right of the videos.

 The Coursera website is set up to send you reminder emails if you fall
behind. Evidence suggests this will help you complete the course, but if you
find this to be annoying, you can reset or turn off the reminders. Just click on
the Home icon and then scroll down to the settings at the bottom of My
Course Progress.

 If you see any typos or experience any technical glitches, please let

us know on the appropriate forums.

Module 1. Introduction / What is the Pie?

We begin with some theory, specifically the theory of the “pie,” which
provides a picture for what’s at stake in a negotiation. It’s an important tool
that will help you get a sense of what you’re really negotiating over and how
to divide it.

We’ll discuss that second part first, though it is the last stage of a
negotiation. Why? Most of the hard work of negotiation is figuring out the
relevant issues, what each party brings to the table, and what things are
worth, and then exploring ways they can each benefit from the agreement and
grow the pie. If you have a good idea for how to fairly resolve the negotiation
once the issues are identified, this should encourage both parties to put some
of their cards on the table so they can better identify what’s at stake.

I end the week with some challenging material. In the Shapley Value
segment, I show how to extend the theory to situations with three or more
parties. This requires more mathematics, which is why we’ll mostly stick to
negotiations with two parties in the rest of the course.

Module 2. Negotiation Caselets

After presenting the theory, I show how it applies to some mini cases, or
caselets. The Merger Case lets you do a practice negotiation before we turn
to cases where you will negotiate with others. The Ultimatum Game is our
first interactive exercise, which gives you a chance to negotiate with your
fellow classmates and with me.

At the end of this and the next three modules is a mastery quiz. I’ve tried to
make this a learning experience and not just a test. This first mastery quiz
covers material from Modules 1-2.

Module 3. Zincit
This is our first case study. It may look like a simple one-page case, but don’t
let the brevity fool you. This case will provide opportunities to discuss a wide-
ranging set of topics including how to prepare for a negotiation, making
ultimatums, alternating removals, avoiding regret, expanding the pie, and
dealing with someone who has a very different perspective on the world.
There is over an hour of material debriefing the case. I’ll say it here and I’ll
say it again: do the negotiation yourself before jumping ahead to the
debriefing.

Module 4. Outpsider
Our second case study is more difficult. Here each party has some piece of
hidden information that the other is not privy to. Much like real life, neither
party has enough information to figure out a solution on his or her own.
Sharing and revealing information thus becomes a critical part of the
negotiation. What should each party share? What should they keep to
themselves? This case also provides an opportunity to discuss tactics such
as who should make the first offer, what the first offer should look like, and
how you should respond to threats. And let me give you a big hint: do not fight
the previous battle. What worked for you in Zincit won’t work in the Outpsider
case.

Module 5. Advanced Topics

This module is a collection of short lessons. We cover everything from
negotiating when you have no power to negotiating over email. I even take a
detour into test taking, showing how the game theory inspired approach we
use in negotiation can help you (or your kids) do better on standardized tests.
I end with some key lessons I learned from a taxi ride that went the wrong
way.

The section on Rubinstein Bargaining is particularly hard, and therefore

optional. I include it because I think it is interesting, elegant, and worthy of a
Nobel Prize, but it isn’t essential to what follows.

Module 6. Linda Babcock: Ask for It

In this module, we are joined by Professor Linda Babcock, the James M.
Walton Professor of Economics at Carnegie-Mellon University and a world-
renowned expert on negotiation. Her specialty is the role of gender
differences in negotiation. She is the coauthor of many well-cited journal
articles and two award-winning books: Women Don’t Ask and Ask for It.

In a series of presentations, Linda puts some dollars and cents on the value of
asking, and then outlines how to do it. The value of this material isn’t just for
women. We can all benefit from learning how to better prepare for a
negotiation, be soft in style and hard in substance, and aim high without
crashing. In several places earlier in the course, I’ve provided links to Linda’s
perspective on the topic.

Module 7. Herb Cohen: You Can Negotiate Anything

Herb Cohen was kind enough to join me for a guest lecture. He is a
negotiation sensei, and we are fortunate to have his insights. Herb is the
author of two classics in negotiation: You Can Negotiate
Anything andNegotiate This!

In several places earlier in the course, I’ve provided links to Herb’s

perspective on the topic. Here they are all together along with many other
lessons from his more than fifty years of negotiations.

Module 8. John McCall MacBain: The Consummate

Dealmaker
This is a late addition to the course. When John became available, I jumped at
the opportunity. John built a worldwide classified ad paper business through
acquisitions. I doubt anyone has done more deals in more countries than
John. But more than just quantity, he exemplifies principled negotiation. He is
a master at being allocentric -- that is, understanding the objectives of the
other party. And his love of negotiation comes through.
 Acknowledgments and Further Reading
This course is the result of many people's contributions. Here is my chance to
share credit and give thanks.

Enjoy.

Requirements and Grading

Thanks for taking this course. To help you succeed, here is what I expect
from you and what you can expect from me.

Assignments
The nature of this course is half lecture, half lab work. First I will present
some concepts via lecture and animations. Then, you will test those concepts
out to see for yourself. The “lab work” in this case isn’t mixing hazardous
chemicals but doing negotiations with your classmates. I have two reasons
for including these negotiation exercises:

1. I don’t think you can truly learn how to negotiate without doing some
negotiations.

2. We will spend a good deal of time debriefing two of the negotiations.

These debriefs won’t have the same learning value and won’t be very
interesting if you haven’t first done the negotiations for yourself.

There are four required negotiation exercises, all based on case studies I’ve
created for this course. Three are intended to be done face-to-face (Zincit,
Outpsider, Planet-Gazette-Sun), and one is meant to be done over email
(Photo Op). First I’ll explain some principles to consider, next you will do the
negotiation, and then we will debrief what happened.

That’s the idea, but it is going to be a logistical challenge to pull this off.
We’re here to help. We’ve come up with several ways for you to connect with
classmates to do the negotiations. See the Negotiation Logisticspage for
more details. In brief, your options are:

 Best case: Negotiate with people you know who are also taking the
course. If they are nearby, do the negotiations in person. If they are far away,
use Skype (or other video chat).

 Pretty close second: Find partners on the course’s discussion

threads (or connect on Talkabout) and do your negotiations online via video
chat or in person if they live in the same city.
 Distant third: Pair up with someone you know who isn’t taking the
course.

 Fourth choice: If you can’t do the negotiation in person or via video

chat, then do it via audio chat.

I’m also going to ask that you record and edit the Zincit negotiation so you
can receive peer feedback. (As a backup, you may submit a written summary.)
When the time gets closer, you can see How to Record Your Negotiation for
details. I appreciate that the logistics may get a bit complicated. This is a
new course, and we are experimenting with how to make it interactive.

Grading
The key to passing the course, and getting a certificate, is 4-1-4: 4
negotiations, 1 peer review project, and 4 mastery quizzes. For the
negotiation cases and peer review project, you won’t be graded on how you
did the negotiations, only that you did the negotiations. We will be able to
provide some feedback as to how well you did relative to others, but that
won’t affect your grade.

The mastery quizzes appear at the end of each of Modules 2 - 5. They will test
that you’ve actually watched all the material in the course and understand the
concepts that have been presented. Each of these quizzes will be public in
that you can see a preview of all the questions (but not the answers) on the
mastery quiz before starting it. Once you are confident you know all the
material, then go ahead and take it. But at that point, it will be eight hours
before you can take it again.

Along the way, there will be a few short ungraded quizzes to help reinforce
the learning from the previous segment. And there will be a couple interactive
exercises where you will be asked to come up with some negotiation
strategies, but there are no objective right answers. How well you do depends
on what other people in this course would do if they were negotiating with
you. So, here too, what matters is you complete the exercise.

The course is relatively short in that we have about 8 hours of material. But if
you add the time to do the negotiations then the total commitment is closer
to 12 hours.

Thanks for reading this far. Now let’s get started.

We are collecting frequently asked questions and posting them here along
with answers. Please free to suggest some in the discussion forum.

Is a Statement of Accomplishment available for this course?

No. Statements of Accomplishment are not available for this course. For more
information on receiving a Course Certificate, see
[Link]

Can I change my deadlines for the course?

Yes. This course is self-paced, with suggested deadlines to help you keep on
track. There is no penalty for missing a deadline. If you would like to adjust
your deadlines or turn them off altogether, you'll find the relevant information
here:

[Link]
Days

Is it okay if I do the negotiation cases in a language other than English?

Yes. However, for the peer review assignment for the Zincit case, submitting
a video or written summary in another language may greatly limit who is able
to competently review your project. We recommend that if you negotiate in
another language, you submit a written summary in English.

Recommended Books

While there are no required textbooks for this course, I want to provide a list
of recommended books on the subject of negotiation. Below are links to
purchase them from [Link] or find them at an independent bookstore.
I've also included a list of my books. The topics range from game theory to
innovation to business strategy to entrepreneurship.

Ask For It: How Women Can Use the Power of Negotiation to Get What They
Really Want by Linda Babcock and Sara Laschever - Amazon | Indiebound

Women Don't Ask: The High Cost of Avoiding Negotiation─and Positive

Strategies for Change by Linda Babcock and Sara Laschever
- Amazon | Indiebound

Negotiating Rationally by Max H. Bazerman and Margaret A. Neale

- Amazon | Indiebound

Negotiation Genius: How to Overcome Obstacles and Achieve Brilliant Results

at the Bargaining Table and Beyond by Deepak Malhotra and Max Bazerman
- Amazon | Indiebound

Negotiate This!: By Caring, But Not T-H-A-T Much by Herb Cohen

- Amazon | Indiebound

You Can Negotiate Anything: The World's Best Negotiator Tells You How To
Get What You Want by Herb Cohen - Amazon | Indiebound
 Getting to Yes by Roger Fisher, William Ury, and Bruce Patton
- Amazon | Indiebound

Books by Barry Nalebuff (and their translated

versions)
Mission in a Bottle: The Honest Guide to Doing Business Differently─and
Succeeding by Seth Goldman and Barry Nalebuff, illustrated by Sungyoon
Choi - Amazon | Indiebound

 Korean: 코카콜라가 감동한 어니스트 티의 기적 ISBN 978-89-6051-384-6

Lifecycle Investing: A New, Safe, and Audacious Way to Improve the

Performance of Your Retirement Portfolio by Ian Ayres and Barry Nalebuff
- Amazon | Indiebound

The Art of Strategy: A Game Theorist's Guide to Success in Business and

Life by Avinash K. Dixit by Barry J. Nalebuff - Amazon | Indiebound

 Chinese (Mandarin): 妙趣横生博弈论 事业与人生的成功之道 ISBN 978-7-111-

27693

 Italian: L’arte Della Strategia ISBN 978-88-6380-011-1

 Japanese: 戦略的思考をどう実践するか : エール大学式「ゲーム理論」の活用法

ISBN 978-4-484-10108-8

 Korean: 전략의 탄생 ISBN 978-89-92647-71-7

 Spanish: El arte de la estrategia ISBN 978-84-95348-52-4

Why Not?: How to Use Everyday Ingenuity to Solve Problems Big And
Small by Barry J. Nalebuff and Ian Ayres - Amazon | Indiebound

 Chinese (Mandarin): 创新 DIY ISBN 7-100-04482-0

 Chinese (Taiwan): WhyNot: 創意之樂 ISBN 957-13-4073-1

 Estonian: Miks mitte? ISBN 9985-62-252-9

 Japanese: エール大学式 4 つの思考道具箱 ISBN 4-484-04112-X

 Korean: 안될 것 없잖아 ISBN 89-8407-173-0

 Portuguese: Você Pode Tudo: idéias criativas para os problemas do dia-

a-dia ISBN 85-352-1397-X

 Spanish: ¿Y por qué NO? ISBN 84-95787-73-3

 Vietnamese: Tại Sao Không? Làm Thế Nào Để Giải Quyết Các Vấn Đề Lớn
Nhỏ Bằng Cách Sử Dụng Sáng Kiến Trong Cuộc Sống Hằng Ngày?

Co-opetition by Adam M. Brandenburger and Barry J. Nalebuff

- Amazon | Indiebound

 Chinese (Mandarin): 合作竞争 Cooperation and Competition ISBN 978-7-

212-01767-5 (Same as ISBN 7-212-01767-1)

 Chinese (Taiwan): 競合策略: 商業運作的真實力量 ISBN 978-986-89802-7-3 and

競合策略: 賽局理論的經營智慧 ISBN 978-986-154-046-7

 Dutch: Spelen met de Concurrent (Coöpetitie) ISBN 90-254-0560-6

 French: La Co-opétition Une révolution dans la manière de jouer

concurrence et cooperation ISBN 2-84211-014-5

 German: Coopetition, kooperativ konkurrieren ISBN 3-593-35585-X

 Greek: συν-ανταγωνισμός ISBN 960-03-2446-8

 Hebrew: ‫ תורת המשחקים בשירות העסקים‬:‫ לשנות את המשחק‬ISBN 0-07700-00233-4

 Indonesian: Ko-opetisi

 Japanese: ゲーム理論で勝つ経営 競争と協調のコーペティション戦略 ISBN 978-4-

532-19206-8 (Same as コーペティション経営―ゲーム論がビジネスを変える― ISBN
978-4-532-14553-8)

 Korean: 코피티션 ISBN 978-8947-52178-9

 Portuguese: Co-Opetição ISBN 85-325-0689-5

 Russian: Co-opetition: Конкурентное сотрудничество в бизнесе ISBN

978-5918-48013-7

 Spanish (Latin America): Coo-petencia ISBN 958-04-8641-7 (This is the

2005 version. The 1997 version is ISBN 958-04-3503-0.)

 Spanish (Spain): Coopetición ISBN 84-7978-317-6

 Swedish: Co-opetition ISBN 91-7698-061-8

 Turkish: Ortaklaşa Rekabet ISBN 975-7132-22-5

 Vietnamese: Lý Thuyết Trò Chơi Trong Kinh Doanh

Thinking Strategically: The Competitive Edge in Business, Politics, and

Everyday Life by Avinash K. Dixit by Barry J. Nalebuff
 - Amazon | Indiebound (Note that Thinking Strategically was substantially
revised, so much so that we gave it a new title—the newer version is The Art
of Strategy listed above.)

 Chinese (Mandarin): 策略思维 ISBN 978-7-300-17262-0 (Old edition: ISBN

978-7-300-04338-8)

 Chinese (Taiwan): 大謀略:遊戲理論的全方位運用 ISBN 957-627-489-3

 German: Spieltheorie für Einsteiger ISBN 3-7910-1239-8 Paperback

(ISBN 3-7910-0913-3 Hardcover)

 Hebrew: ‫ המשחקים תורת‬ISBN 965-511-314-0

 Italian: Io Vinco Tu Perdi ISBN 8-8836-3936-7

 Japanese: 戦略的思考とは何か―エール大学式「ゲーム理論」の発想法 ISBN 4-484-

91123-X

 Korean: 전략적 사고 ISBN 89-85103-05-9

 Portuguese: Pensando Estrategicamente ISBN 85-224-1165-4

 Spanish: Pensar Estratégicamente ISBN 84-85855-60-4

 Turkish: Stratejik Düşünme ISBN 975-8362-20-8

 Vietnamese: Tư Duy Chiến Lược (Lý Thuyết Trò Chơi Thực Hành)

Planet–Gazette Case

Merger Negotiations
The New Haven Planet and the Hartford Gazette are contemplating a merger.
Roughly speaking, newspapers are valued on a per-reader basis.
The Planet has 100,000 subscribers, while the Gazette is twice as large
with 200,000 readers. Currently, the Planet has a market cap of $10m, while
the Gazette has a market cap of $22m.*
The reasons for a merger are as follows:

By combining their joint purchasing, the two papers expect to reduce paper
and printing costs by 2.3%. The present discounted value of this cost savings
is $2m to the Planet and $4m to the Gazette.

The Gazette is starting from a position with lower production costs than the
Planet. The cost advantages of the Gazette can all be transferred to the
Planet’s operation. The projected savings are $125k annually to the Planet,
which adds $1 million to the current value (or market cap) of the company.

The merger will allow the two papers to cut overhead. The reduction in
headcount is worth a total of $150k annually, or $1.2m in present discounted
value.

It is believed there is a possibility of expanding readership through joint

subscription offers. It is thought that 5% ofPlanet readers will start
subscribing to the Gazette and 5% of Gazette readers will start subscribing
to the Planet. The value of the new 5,000 Gazette readers is worth $550k (at
current market prices), and the value of the new 10,000Planet readers is
worth $1m (at current market prices). If we assume the Planet will have the
same profitability as the Gazette post-merger, then the new Planet readers
will be worth $1.1m.

In addition, there is a reduced need for working capital, synergies in selling

ads, and in building the online paper. These synergies have not been
quantified.

As a result of the merger discussions, both parties have all the information
above. These two papers have agreed on how the editorial side of the
business will combine operations. The major sticking point is the financial
terms for the merger. The two sides agree the new combined entity will have
a market cap of $41.85 million.

Based on the relatively small size of these two papers, you should assume
that there are no other potential merger partners. No joint ventures are
possible. Either the Planet and the Gazette reach a deal or they don’t. If no
deal is reached, then both sides continue with their business as usual and
none of the synergies are achieved.

IF YOUR BIRTHDAY IS BETWEEN JANUARY 1 & JUNE 30 THEN:

You are representing the Hartford Gazette in the merger. Your job is to make
the best case for paying a low price. What is the lowest purchase price you
can justify, and how do you justify it? What do you think is the fair outcome?

IF YOUR BIRTHDAY IS BETWEEN JULY 1 & DECEMBER 31 THEN:

You are representing the New Haven Planet in the merger. Your job is to make
the best case for getting a high price. What is the highest purchase price you
can justify, and how do you justify it? What do you think is the fair outcome?

________________________

* The Gazette is more profitable on a per-reader basis and thus has a higher
market cap per reader.

Barry Nalebuff prepared this exercise for the sole purpose of teaching
negotiation. This case is not meant to describe actual events. © 2015 Barry
Nalebuff. All Rights Reserved.

Adding a Second Buyer

1 question
Submit Quiz

1. 
In the original version of the case, the New Haven Planet and the Hartford
Gazette were contemplating a merger. The Planet has a market cap of $10m,
while the Gazette has a market cap of $22m. Because of the cost savings and
expanded readership, the two firms together would have a market cap of
$41.85 million, which is $9.85 million more than their individual valuations
combined.

To keep things simple, we will think of the Gazette as the buyer and the
Planet as the seller. Thus the Gazette is willing to pay as much as $19.85m
and the Planet is willing to sell for anything above $10m. Absent any other
bidders, we expect the two parties to settle on a price that splits the gains
evenly (or splits the pie).

In this version of the case, we add a new player, the Stamford Sun, as a
second potential buyer for the Planet. The Sun is willing to pay up to $18
million for the Planet. (The Sun can create synergies, but not quite as much
as the Gazette.)

Assume all three players in this negotiation are fully aware of all these
numbers. Thus the Planet knows the Gazette is willing to pay up to $19.85m
and the Sun is willing to pay up to $18m. Similarly, the Gazette and the Sun
know each other’s valuations as well as the Planet’s current market value of
$10m.

Based on the relatively small size of these papers, you should also assume
there are no other potential merger partners. No joint ventures are possible.
The Planet will reach a deal with either the Gazette or the Sun. If neither deal
is reached, then all three parties continue with their business as usual and
none of the synergies are achieved.

And to keep things simple, you should assume the Sun has no interest in
purchasing the Gazette (or vice versa), and there is no potential for all three
papers to combine. Below is a recap of the relevant numbers:

Planet alone $10m

Gazette alone $22m

Planet + Gazette $41.85m

Total Synergy of Planet–Gazette merger $9.85m

Most Gazette will pay for Planet $19.85m

Total Synergy of Planet–Sun merger $8m

Most Sun will pay for Planet $18m

Given the presence of this additional bidder, what price do you expect the
Planet will get?

$14.925m (the same as before)

$18m ($3.075m more)

$18.925m ($4m more)

$19.85m ($4.925m more)

Adding a Second Buyer

1/1 question correct
Excellent!
Retake
Next

Correct
1. 
In the original version of the case, the New Haven Planet and the Hartford
Gazette were contemplating a merger. The Planet has a market cap of $10m,
while the Gazette has a market cap of $22m. Because of the cost savings and
expanded readership, the two firms together would have a market cap of
$41.85 million, which is $9.85 million more than their individual valuations
combined.

To keep things simple, we will think of the Gazette as the buyer and the
Planet as the seller. Thus the Gazette is willing to pay as much as $19.85m
and the Planet is willing to sell for anything above $10m. Absent any other
bidders, we expect the two parties to settle on a price that splits the gains
evenly (or splits the pie).

In this version of the case, we add a new player, the Stamford Sun, as a
second potential buyer for the Planet. The Sun is willing to pay up to $18
million for the Planet. (The Sun can create synergies, but not quite as much
as the Gazette.)

Assume all three players in this negotiation are fully aware of all these
numbers. Thus the Planet knows the Gazette is willing to pay up to $19.85m
and the Sun is willing to pay up to $18m. Similarly, the Gazette and the Sun
know each other’s valuations as well as the Planet’s current market value of
$10m.

Based on the relatively small size of these papers, you should also assume
there are no other potential merger partners. No joint ventures are possible.
The Planet will reach a deal with either the Gazette or the Sun. If neither deal
is reached, then all three parties continue with their business as usual and
none of the synergies are achieved.

And to keep things simple, you should assume the Sun has no interest in
purchasing the Gazette (or vice versa), and there is no potential for all three
papers to combine. Below is a recap of the relevant numbers:

Planet alone $10m

Gazette alone $22m

Planet + Gazette $41.85m

 Total Synergy of Planet–Gazette merger $9.85m

Most Gazette will pay for Planet $19.85m

Total Synergy of Planet–Sun merger $8m

Most Sun will pay for Planet $18m

Given the presence of this additional bidder, what price do you expect the
Planet will get?

$14.925m (the same as before)

$18m ($3.075m more)

$18.925m ($4m more)

Well done! 
That's right. While the Sun will eventually get outbid by the Gazette, it won't
give up until the price exceeds $18m. At that point, we are back to a two-
party negotiation over how to split the remaining $1.85m of pie. We can
expect the Planet to get half of it. Thus we expect the Planet to end up with
$18.925m, up from $14.925m. Having the Sun in the mix is worth an extra $4
million to the Planet.

This example shows that no matter how good you are as a negotiator, you will
do even better when you have another bidder on the other side.

$19.85m ($4.925m more)

EM
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Once we were part of Coca-Cola, there was still a question of how to share the cost savings. The
way it is done at Coca-Cola—and I expect at most large companies—is that there is one central
group that does all the purchasing, and the operating units (like brands) are charged an annual
fee to cover the overhead costs of the purchasing group. The annual fee is typically tied to the
sales of the operating unit. This arrangement worked out particularly well for Honest Tea. The
sales were low, so Honest Tea’s share of the overhead cost was low. However, the savings were
large as Honest Tea's costs coming into Coca-Cola’s system were unusually high.
This is the flip of the first argument I mentioned in the video. Instead of dividing the benefits in
proportion to sales, we divide the costs in proportion to sales.

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It is a bit of an oversimplification to say Your Reservation Value = Your BATNA. Really, it is that
your reservation value equals the value of your BATNA. In the case of Abe and Bea, their best
alternatives are expressed as values, so there is no issue. Sometimes, however, you will need to
convert your BATNA into a monetary value comparable to your reservation price. Here's an
example my colleague Daylian Cain uses to illustrate this point.

As a recent graduate, you have been offered a job in New York City. It isn't your perfect job. It
isn't even a good job. But it is the only job offer you have. If you don't take it, you will have to
move back home and live with your parents while you try to find some other alternative. Moving
back home is your BATNA. Say you need to earn more than $17,500 in order to make this job
better than moving back home. Then that's the value of your BATNA and your reservation price.

The issue is that you are being asked to compare apples and oranges. Your BATNA is moving
back home, and your reservation value is expressed in dollars. You have to come up with a
monetary value for moving back home and also take into account all the non-monetary aspects
of your job. If the job’s salary were at your reservation value, then the job with all of its benefits
and drawbacks would be no better or no worse than moving back home and trying again. In this
case and more generally, your reservation value is how much you need to get paid in order to
avoid having to take your BATNA.

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Buying a House

Here's a good way of testing your understanding of a reservation value. The scenario comes
from my colleague Daylian Cain.

You and your spouse have been renting and are looking to buy a house. The first house you see
is truly your dream house. It has the perfect location, the perfect size, the perfect architectural
style, even the perfect color. When you consider everything from the joy you would get living in
this house to the tax advantages of ownership, you figure this is better than your current situation
for any price up to $550,000.

Even though this house seems perfect, your agent suggests you should look at one more place,
especially since the appointment has already been made. The second house is quite nice and
much better than your current living situation. When you consider everything from the happiness
you would get living in this house to the tax advantages of ownership, you figure this is better
than your current situation for any price up to $410,000. As it turns out, the owner is very anxious
to sell. The agent confirms that you could buy this house for the bargain price of $350,000.

Let's assume the agent is right about the $350,000 price. And, to keep things simple, we'll also
assume you aren't going to do any better than this second choice house (in terms of value) if you
don't end up with your dream house. In other words, this second house is your BATNA.

What is your reservation price?

$550,000

$500,000

$490,000

$410,000

$350,000

You can't put a price on happiness.

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Buying a House

Here's a good way of testing your understanding of a reservation value. The scenario comes
from my colleague Daylian Cain.
You and your spouse have been renting and are looking to buy a house. The first house you see
is truly your dream house. It has the perfect location, the perfect size, the perfect architectural
style, even the perfect color. When you consider everything from the joy you would get living in
this house to the tax advantages of ownership, you figure this is better than your current situation
for any price up to $550,000.

Even though this house seems perfect, your agent suggests you should look at one more place,
especially since the appointment has already been made. The second house is quite nice and
much better than your current living situation. When you consider everything from the happiness
you would get living in this house to the tax advantages of ownership, you figure this is better
than your current situation for any price up to $410,000. As it turns out, the owner is very anxious
to sell. The agent confirms that you could buy this house for the bargain price of $350,000.

Let's assume the agent is right about the $350,000 price. And, to keep things simple, we'll also
assume you aren't going to do any better than this second choice house (in terms of value) if you
don't end up with your dream house. In other words, this second house is your BATNA.

What is your reservation price?

$550,000

$500,000

$490,000

Well done! 

Well done. Buying your second choice home leaves you $60,000 better off than your current
situation. Thus you should end up at least $60,000 better off in your dream home. Otherwise,
your BATNA is better than the dream house. We set things up so your dream house was as good
as your current apartment at a price of $550,000. Thus for your dream house to be $60,000
better than the status quo (and hence as good as your BATNA), the sale price has to be
something less than $490,000.

$410,000

$350,000
You can't put a price on happiness.

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How much was Shuang risking when he turned down the $500/day offer?

$500/day

$300/day

$200/day

Well done! 

That's right. Shuang's BATNA was $300/day. What he was risking by saying no was the amount
over his BATNA, or $200/day. That said, one could argue that nothing was at risk. Even if
Shuang turned down the $500/day, the agency could come back to him and say "Sorry, that's all
we have to pay you." At that point, Shuang could change his mind and say yes. The only risk
was that the agency would be so offended by Shuang's refusal that they wouldn't come back to
him with their original offer. Want a more detailed explanation? See video on YouTube or Tudou.

Nothing

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 BATNA

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ZOPA

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How much did Shuang improve his position by negotiating?

$1,500/day

$1,200/day

$1,000/day

Well done! 
That's right. The agency's initial offer was $500/day, and their final offer was $1,500/day, so
Shuang gained $1,000/day as a result of the negotiation. By making a counteroffer, he ended up
$1,200 ahead of his BATNA, which is six times his initial gain of $200.

$500/day

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 BATNA

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ZOPA

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EM

  

1. Course Home
2. Week 2
3. Reservation Values / BATNA

Lesson Progress




ZOPA

Having introduced you to the term BATNA, I want to take a moment to explain
another common term used in negotiation. ZOPA stands for Zone of Possible
Agreement. For example, in the original Abe and Bea negotiation over how to
divide a pie of size 9, Abe must get at least 1 since he can get that much on
his own—that's his BATNA. He can't get more than 7 or Bea won't be getting
at least her BATNA of 2. Thus the ZOPA is [1, 7] when measured in terms of
what Abe gets. Note the size of the ZOPA (7 - 1 = 6) is the same as the size of
the pie. Thus if there's no ZOPA then there's no potential to do a deal and no
pie to share.

In Shuang's negotiation, he knew right off the bat there was a ZOPA of at
least $200. His BATNA was $300, and the agency's first offer was $500. When
he counteroffered $1,200, Shuang was trying to see how high the ZOPA
extended. It turned out to reach not only to $1,200, but to $1,500 and maybe
even further if the agency wasn't telling the full truth about how much they
were paying the star of the commercial.

Our proposal to split the pie is the same as reaching an agreement at the
midpoint of the ZOPA. I want you to be familiar with this term in case you
hear it elsewhere. Going forward in this course, I'll stick with the pie
metaphor.

Start by Asking

Previous Item
 Negotiating With Others

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  

1. Course Home
2. Week 2
3. Reservation Values / BATNA

Lesson Progress


Negotiating With Others

Reflect on a time you successfully negotiated with someone. What principles

did you base your argument upon? What reasons did you give to support your
position?

Your response has been submitted. Engage and discuss with other learners
below!

 Evans Munetsi now
E
my ability to perform the work, BATNA, and lack of competition
M
 0

Reply

 Iryna Seliutina 2 hours ago

IS
I negotiated with my boss for my salary size. I demanded to rise my salary by 30%. Such
promotions happen in our company rather rare. Nevertheless I'm the rare professional at such
business and it was difficult to find someone such qualified on this position. So I told that I'm
ready to work even more efficiently and to bring more ideas, but I want more. My boss agreed
with me and he could make the rebudgetting of our department to incline my salary by 25%. Not
that much as I asked, but I would work in this company for 15% plus to my salary.

 0 Upvote

Reply


Kim Chandler-Gamblin 2 hours ago

In a follow up phone call from an interview I was offered the position. However, I had another
company that I was waiting for a response from and that would have meant a great deal more in
salary and options. I didn't tell the person on the phone that but I said that ultimately, I was
looking for a management position and and more money which this position she offered me was
not either. I was on the brink of turning the offer down but was still doubting the alternative
company. Finally, after talking with her a bit longer she told me she would give me that cap
salary on the position and that she would be grooming me for a leadership role that does lead to
a management position eventually and she made it clear to me that at some point in time she
would retire as well. So after she mentioned that, I accepted the position and did take on a
leadership role as was discussed with a higher salary.

I based my argument on the fact that I had another offer on the table but I didn't know what that
offer would lead to not if I would get an offer. I wouldn't take less than what I really wanted.
Because I had had a management role in my prior position, I had pushed the fact that I wanted a
larger role when asked.

 0 Upvote

·
 Reply

 Rini Sinha  7 hours ago

RS
That the outcome would benefit me the most, the principle was based on what can achieve the
optimum results and still yield the most benefit for me.

Reasoning given were why it was advantageous for the other party to win in my favour.

 0 Upvote

Reply


Ginger King 10 hours ago

Always fact-based.

 0 Upvote

Reply

 Masoud Yadi 12 hours ago

MY
I used to work for a company for $2200 a month. Working hours were 82 hours in a month. At
the end on my first year contract, I had an offer from a different company: $3000 for 72 hours
in month, plus a position as the director of one of the departments.

I sent a notice to my employer and let them know that I will not renew my contract for the
coming year, and that they should find a replacement. After they received the notice, they asked
me to meet with the HR director to change my contract in way that was satisfying enough for
me to stay.

I already knew that I will not renew my contract for anything less that 3000 and more than 82
hours. The director position in the new company was not of my best interest, so I decided not to
take it into consideration when talking to the HR director.

Their new offer was $3000 for 74 hours of work in a month, plus insurance and retirement plan
payments.

As no other company at that time would offer the retirement plan payments, I decided to stay
with them for one more year. But I knew that they had not done it for any of the employees
before me, so I asked them to put a deadline on the application and reception of that service in
the co tract. If not met in three weeks, I would quit and would get my full month salary. This
was in the last month of my previous contract, so in case they did deliver, I would still have my
offer from the new company.

 0 Upvote

Reply


 D.t. Vino 17 hours ago

I convinced my 5 year old son to do homework by telling him if he did not they would cancel
Christmas

 0 Upvote

Reply

 STANISLAV SMYK a day ago

That was long ago. Ultimatum was the strategy. It worked at that time, Didn't try again, cos
risky

 0 Upvote

Reply


T Thao Nguyen a day ago
N
BATNA

 0 Upvote

Reply

 Christopher Jones 2 days ago

CJ
Recently I was negotiating my salary with a new employer. They asked me what I am making at
my current job which was $20/per hour. They said - OK - since you are making $20/per hour we
will also pay you $20/per hour. I was not able to agree with that deal because I had to drive much
further to work for this employer, the work I needed to do was more complicated, and I was going
to have less hours to do the work. Therefore my BATNA was above $20/per hour. The employer's
ZOPA was $35/per hour. I asked for $25/per hour + mileage reimbursement with the option to
increase my salary after 6 months and increase my hours. Or - $35/per hour flat rate. In the end, we
agreed on $30/per hour and a few more hours available to work each week.

 0 Upvote

Reply


W walid zidan mohamed kholif 2 days ago
K
ZOPA principle

 0 Upvote

Reply
 Cadence Peckham 2 days ago
CP
As an associate at my firm, you are expected to work from the office every day while the level
above (and beyond) are allotted a weekly work from home day. About 5 months ago, our
company experienced a high level of attrition, leaving-on a good day-about 4 people in office.
The WFH policy was originally put in place with the intention of promoting "on the job learning"
by interacting with and listening to business conversations from coworkers in the office.
However, due to the attrition, there were very few people to interact with in the office. I
approached the office manager and my personal manager with a request to receive a work from
home day despite not having the title attributed to that privilege. I played to their egos in
acknowledging it was a privilege and relayed my understanding of the policy's intentions. I then
presented the argument that the original intention of the policy was nullified by the lack of people
present in the office during those days where other members of the office worked from home. I
supported my argument by explaining that I was trustworthy and had gained the confidence of my
colleagues and managers to get my work done. Furthermore, when everyone else was out of the
office, it was the same environment as working alone at home, just without the commute. I added
a positive spin to my argument by explaining that it would boost my morale to be allotted this
privilege in a time where morale was running low and the company was at risk of losing top
performers. I was granted an exception to the policy and given a weekly WFH day.

 0 Upvote

Reply


PR Piotr Rocławski 2 days ago

I've given a list of potential benefits for the oponent. Right now I would named it as a pie. But then
i was just a list prepared before the negotiations.

 0 Upvote

Reply

 Sara Gullet 2 days ago

S
I based it upon proportional division. the person wanted to negotiate fairly based on our
G
contributions, and so because i knew how much the pie was i supported my position.

 0 Upvote

Reply


R Raymond S Kelley 3 days ago
K
I was interested in buying a house, and looked at comparison houses in the area. After comparing
prices, I asked for a discount. I got the discount without any haggling, which tells me that I should
have asked for a larger discount. My BATNA was renting an apartment and not buying the house,
and my reservation price was the asking price of the house, and the discount gave me a piece of the
pie. After taking this course, I feel that I could nave negotiated a larger piece of the pie.

 0 Upvote
 ·

Reply

 Raymond S Kelley 3 days ago · Edited

R
Buying a second piece of sports equipment. I requested a discount. I stated that I was a loyal
K
customer, and was already self-referring, and would likely refer more customers to them later.
Also, they could still make a profit, albeit smaller, by selling me a piece of equipment at a
discount. I was willing to walk away, but I got a 45% discount on the item. If you don't ask, you
get nothing. The worst thing they can say is "no".

 0 Upvote

Reply

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ZOPA

Previous Item

Never Say No

Next Item

EM
  

1. Course Home
2. Week 2
3. Reservation Values / BATNA

Lesson Complete!

More Examples of Never Say No

After some of you watched this video, I started hearing more examples of
Never Say No. Post your examples in thisdiscussion thread, and I'll add more
to the list.

1. You call a restaurant for a reservation and they don't have a table at
8:00 on Saturday evening. A good maître d' doesn't just say no. He or she will
typically suggest another time or day, such as "How about a table at 9:30?"

2. From Cecile: When my husband and I take a road trip and neither of us
really feel like driving, instead of saying, "No, I don't want to drive, YOU
 drive," I'd say, "I'll drive--but I get to control the music we play :-)." And
sometimes he would be cool with that, so in those situations it makes the
drive less boring for me because I get to listen to the music that I want, and
he's able to enjoy just being the passenger, and maybe even take a couple of
short naps :-). Other times he'd rather drive than listen to the music I like,
and I'm okay with that too :-).

3. From Stewart: My wife is an artist who does abstract painting. For her,
it's a combination of artistic expression in exercising her creativity,
satisfaction of having her work be selected to be displayed in shows, and
income from selling her art. Occasionally she is asked to do a commissioned
work, which she doesn't like to do - mostly because the piece will be about
someone else's vision and not purely her own. She used to decline such
opportunities, but later decided instead to propose prices high enough to
make her happy to concede her free choice of subject matter. Some
inquirers decline when hearing the price, but several have agreed, and it's
worked out well for everyone involved in each such case!

4. From Valeria: Last year i had a business trip to Barcelona. The journey
lasts 13 Hrs. The flight reservations were asked in order to arrive on Monday
morning and return on thursday afternoon. Instead of saying NO to this great
but exhausting opportunity, I asked my manager to leave the previous Friday
so I could rest for two days, diminish my jetlag and start a long working
week full of energies. They said yes 😊

5. From Erik: Whenever a client calls a bank to make a transaction, our

rule was always to give a 2-way market (a simultaneous bin and and offer on
the product.) We will adjust the size and price to encourage or discourage
either the purchase or sale based on our views of the transaction. The two
way pricing creates liquidity (even at poor prices) that allows are secondary
markets to function.

At the same time, I also heard some exceptions, some cases where you
should say no. My colleague Sharon Oster talked about the advice she gave
her daughter. "If someone asks you out on a date and you aren't interested,
don't say you're busy. Just say: No, thank you." I agree.

And, of course, if someone makes a proposal that violates your ethics, then
just say no. Ethics aren't negotiable.

Never Say No
 Previous Item

Ultimatum Game

Next Item

Planet–Gazette–Sun Case

Instructions
Overview: This is a case study where you negotiate with others, hopefully
using the techniques you've learned so far. This assignment is required in
order for you to complete the course. Once you find your negotiation partners,
this assignment should take less than an hour to complete—maybe 10-15
minutes of preparation time, 30 minutes of negotiation, and a few minutes to
report your results.

Note that this is the exact same case you considered in Week 2 as an
exercise after the Merger Case. In that exercise, you had to imagine how
things would turn out for the different players. Now, with the insight from that
exercise result and from Holland Sweetener’s experience, things might come
out differently.

Here are the instructions and guidelines for the Planet–Gazette–Sun case.

Before the Negotiation

1. Be prepared: Please read the case (below) and do some preparation

before beginning your negotiation.

2. Determine how you want to negotiate, when, and with whom: Again,
see Negotiation Logistics for information on how to do the negotiation
cases (in-person or online) and how to find partners.

3. There are three roles in this case: the representatives for (i) the Planet,
(ii) the Gazette, and (iii) the Sun. You may assign roles however you
like. Unlike Zincit and Outpsider, this negotiation cannot be done with only
 two participants; you must have three people.  Each player should try to do
the best they can given the position they are in.

During the Negotiation

1. You should limit the negotiation to 30 minutes. If after 30 minutes you

do not have a deal, then your result is no deal.

2. Remember, no-agreements are better than bad agreements. You should

never make a deal that is worse than your reservation value, or BATNA.

3. If you reach an agreement and have extra time, you should try for a
post-settlement settlement. If you want to debrief the negotiation with your
partners, you may. Just remember, once the debriefing begins, there should
be no more negotiating.

4. If 2 out of 3 people would like to have a private side conversation, they

may but for no more than five minutes. In person, this means leaving the
room. In online negotiations, they will need to ask the third person to
temporarily mute his or her volume. They can decide to set a time for the
third person to return (like five minutes) or simply get his or her attention (by
waving or by sending a chat message) to rejoin.

5. This negotiation does not need to be recorded, edited, or peer-

reviewed.

After the Negotiation

1. After you finish this negotiation, each participant must report the
results in the poll that follows.

2. Do not discuss the negotiation with any other students until they have
completed the exercise.1. Be prepared: Please read the case and do some
preparation before beginning your negotiation.

Planet–Gazette–Sun
In the original version of the case, the New Haven Planet and the Hartford
Gazette were contemplating a merger. The Planet has a market cap of $10m,
while The Gazette has a market cap of $22m. Because of cost savings and
expanded readership, the two firms together would have a market cap of
$41.85 million, which is $9.85 million more than their individual valuations
combined.

To keep things simple, we will think of the Gazette as the buyer and the
Planet as the seller. Thus the Gazette is willing to pay as much as $19.85m
 and the Planet is willing to sell for anything above $10m. Absent any other
bidders, we expect the two parties to settle on a price that splits the gains
evenly.

In this new version of the case, we add a second potential buyer for the
Planet. The new potential buyer is the Stamford Sun. The Sun is willing to pay
up to $18 million for the Planet. (The Sun can create synergies, but not quite
as much as the Gazette.)

Assume that all three players in this negotiation are fully aware of all these
numbers. Thus the Planet knows the Gazette is willing to pay up to $19.85m
and the Sun is willing to pay up to $18m. Similarly, the Gazette and the Sun
know each other’s valuations as well as the Planet’s current market value of
$10m.

Based on the relatively small size of these papers, you should also assume
there are no other potential merger partners. No joint ventures are possible.
The Planet will reach a deal with either the Gazette or the Sun. If neither deal
is reached, then all three parties continue with their business as usual and
none of the synergies are achieved.

Note #1: The Sun has no interest in purchasing the Gazette (or vice versa),
and there is no potential for all three papers to combine.

Note #2: In many contexts it is illegal to pay a firm not to compete. Thus, in
this negotiation exercise, the Gazette may not pay or provide other type of
compensation to the Sun for it not to compete.

Barry Nalebuff prepared this exercise for the sole purpose of teaching
negotiation. This case is not meant to describe actual events. © 2015 Barry
Nalebuff. All Rights Reserved.

EM

  

1. Course Home
2. Week 2
3. Mastery Quiz for Module 1 – 2

Lesson Progress


Preview of Mastery Quiz 1 – 2

Here is your preview of all of the questions (though not the possible answers)
on the Mastery Quiz 1 – 2. I want you to know what to expect. The questions
are meant to test whether you have watched all the material and understand
the concepts presented in Modules 1 – 2. You can see that if you haven’t
reviewed the material it will be hard to pass this quiz. Some of the questions
assume that you know what a Shapley Value is or how to play an ultimatum
game. So, go back and look over the course material. Once you've taken the
quiz, you won't be able to retake it for eight hours.

Q1. What is the pie? (definition)

Q2. If Abe and Bea reach an agreement, they can create 12 together. If they
don’t, Abe can create 3 on his own and Bea can create 1 on her own. What is
the pie?

Q3. In the above scenario, how much should Abe get?

Q4. Andrea and Beth are dining at a fine restaurant. There is a bottle of 2009
Grgich Hills Chardonnay on the menu and the price is $100. To keep things
simple, albeit unrealistic, assume the restaurant only sells whole bottles and
this is the only wine they carry.

 Andrea would be willing to pay $110 to drink the whole bottle.

 Andrea would be willing to pay $90 to drink half the bottle.

 Beth would be willing to pay $80 to drink the whole bottle.

 Beth would be willing to pay $50 to drink half the bottle.

What is the pie, in dollars?

Q5. In the question above, how much should Andrea pay, in dollars, if they
split the pie?

Q6. Recall that if Aegean and Baltic share the cost of a new software
program, Aegean will benefit $100 while Baltic benefits $200. If the software
costs $100 total, how much should Aegean pay, in dollars?

Q7. What is the Shapley Value? (Definition).

Q8. In the Planet–Gazette merger, the Gazette was twice as big as the Planet.
If the Planet were the same size as the Gazette, how much more of the pie
would you expect the Planet to get?

Q9. Recall in the Planet–Gazette merger case, the increased productivity from
the Gazette’s know-how was worth $1 million to the Planet. Imagine the
Planet could hire a consultant to improve its productivity up to the same level
as the Gazette. The cost of the consultant would be $200,000. Of course, with
the merger, there is no need for the consultant. When the Planet has the
ability to hire a consultant, how much more money should the Planet get in
the merger?

Q10. In the case of Rio Tinto and BHP, recall that their market caps prior to
the merger were approximately $160 billion (Rio Tinto) and $240 billion (BHP).
The merger was believed to create $30 billion of synergies in present
discounted value (PDV). How much more could Rio Tinto hope to get by using
the theory of the pie instead of proportional division?

Q11. Consider an Ultimatum Game where the pie is $100. You are the
receiver. What reserve price maximizes your expected payout?

Q12. In an Ultimatum Game where the pie is $100, would you rather be the
person making the offer or the person receiving the offer?

Q13. You should propose proportional division if it benefits you. [Y/N]

Q14. Abe and Bea each have some money to invest in a CD (Certificate of
Deposit). Abe has $5,000 and Bea has $20,000. Both are interested in making
a 6-month investment at Synchrony Bank. The CD rates for Synchrony Bank
(as of July 8, 2015) are as listed below.
With 0.41% interest, Abe would get $5,010 in six months. With 0.50% interest,
Bea would get $20,050 at the end of six months.

If they pool their funds, they will be able to purchase a $25,000 CD, which
pays a higher interest rate. The 0.60% interest will return $25,075 at the end
of six months.

Obviously, Abe gets back his $5,000 principle, and Bea gets back her $20,000
principle. How should the $75 interest be divided between the two of them?

FAQ

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Mastery Quiz 1 – 2
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Shapley Value
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DEFINITION OF 'SHAPLEY VALUE'

In game theory, a manner of fairly distributing both gains and
costs to several actors working in coalition. The Shapley value
applies primarily in situations when the contributions of each
actor are unequal. The Shapley value ensures each actor gains
as much or more as they would have from acting
independently. This is important, because otherwise there is
no incentive for actors to collaborate.

BREAKING DOWN 'SHAPLEY VALUE'

A famous example of the Shapley value in practice is the
airport problem. In the problem, an airport needs to be built in
order to accommodate a range of aircraft which require
different lengths of runway. The question is how to distribute
the costs of the airport to all actors in an equitable manner.
The solution is simply to spread the marginal cost of each
required length of runway amongst all the actors needing a
runway of at least that length. In the end, actors requiring a
shorter runway pay less, and those needing a longer runway
pay more. However, none of the actors pay as much as they
would have if they had chosen not to cooperate.

Read more: Shapley Value Definition |

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Shapley value
From Wikipedia, the free encyclopedia
 In game theory, the Shapley value, named in honour of Lloyd Shapley, who introduced it in
1953, is a solution concept in cooperative game theory.[1][2] To each cooperative game it assigns a
unique distribution (among the players) of a total surplus generated by the coalition of all players.
The Shapley value is characterized by a collection of desirable properties. Hart (1989) provides a
survey of the subject.[3][4]

The setup is as follows: a coalition of players cooperates, and obtains a certain overall gain from
that cooperation. Since some players may contribute more to the coalition than others or may
possess different bargaining power (for example threatening to destroy the whole surplus), what
final distribution of generated surplus among the players should arise in any particular game? Or
phrased differently: how important is each player to the overall cooperation, and what payoff can
he or she reasonably expect? The Shapley value provides one possible answer to this question.

Contents
  [hide] 

 1Formal definition
 2Example
o 2.1Glove game
 3Properties
 4Addendum definitions
 5Aumann–Shapley value
 6See also
 7References
 8External links

Formal definition[edit]
Formally, a coalitional game is defined as: There is a set N (of n players) and a function   that
maps subsets of players to the real numbers:  , with  , where   
denotes the empty set. The function   is called a characteristic function.

The function   has the following meaning: if S is a coalition of players, then  (S), called the
worth of coalition S, describes the total expected sum of payoffs the members of  can obtain by
cooperation.

The Shapley value is one way to distribute the total gains to the players, assuming that they all
collaborate. It is a "fair" distribution in the sense that it is the only distribution with certain
desirable properties listed below. According to the Shapley value, the amount that player i gets
given a coalitional game   is

where n is the total number of players and the sum extends over all subsets S of N not
containing player i. The formula can be interpreted as follows: imagine the coalition being
formed one actor at a time, with each actor demanding their contribution v(S∪{i}) − v(S) as a
fair compensation, and then for each actor take the average of this contribution over the
possible different permutations in which the coalition can be formed.

An alternative equivalent formula for the Shapley value is:

where the sum ranges over all   orders   of the players and   is the set of
players in   which precede   in the order  .

Example[edit]
Consider a simplified description of a business. An owner, o, provides crucial capital in
the sense that without him no gains can be obtained. There are k workers w1,...,wk, each
of whom contributes an amount p to the total profit. So N = {o, w1,...,wk} and v(S) = 0
if o is not a member of S and v(S) = mp if S contains the owner and m workers.
Computing the Shapley value for this coalition game leads to a value of kp/2  for the
owner and p/2  for each worker.
Glove game[edit]
The glove game is a coalitional game where the players have left and right hand gloves
and the goal is to form pairs.

where players 1 and 2 have right hand gloves and player 3 has a left hand glove

The value function for this coalitional game is

Where the formula for calculating the Shapley value is:

Where   is an ordering of the players and   is the set of players in   
which precede   in the order 

The following table displays the marginal contributions of Player 1

Order 
By a symmetry argument it can be shown that

Due to the efficiency axiom the sum of all the Shapley values is
equal to 1, which means that

Properties[edit]
The Shapley value has the following desirable properties:

1. Efficiency: The total gain is distributed:

2. Symmetry: If i and j are two actors who are equivalent in

the sense that

for every subset S of N which contains neither i nor j,

then φi(v) = φj(v).

3. Linearity: if two coalition games described by gain

functions v and w are combined, then the distributed
gains should correspond to the gains derived
from v and the gains derived from w:
for every i in N. Also, for any real number a,

for every i in N.

4. Zero Player (Null player): The Shapley

value   of a null player i in a game v is
zero. A player   is null in   
if   for all coalitions  .

In fact, given a player set N, the Shapley value

is the only map from the set of all games to
payoff vectors that satisfies all four properties
1, 2, 3, and 4 from above.

Addendum definitions[edit]
1. Anonymous: If i and j are two actors,
and w is the gain function that acts just
like v except that the roles of i and j have been
exchanged, then φi(v) = φj(w). In essence, this
means that the labeling of the actors doesn't
play a role in the assignment of their gains.
Such a function is said to be anonymous.

2. Marginalism: the Shapley value can be

defined as a function which uses only the
marginal contributions of player i as the
arguments.

Aumann–Shapley
value[edit]
In their 1974 book, Lloyd Shapley and Robert
Aumann extended the concept of the Shapley
value to infinite games (defined with respect to
a non-atomic measure), creating the diagonal
formula.[5] This was later extended by Jean-
François Mertens and Abraham Neyman.

As seen above, the value of an n-person game

associates to each player the expectation of his
contribution to the worth or the coalition or
players before him in a random ordering of all
the players. When there are many players and
each individual plays only a minor role, the set
of all players preceding a given one is
heuristically thought as a good sample of the
players so that the value of a given infinitesimal
player   around as "his" contribution to the
worth of a "perfect" sample of the population of
all players.

Symbolically, if   is the coalitional worth

function associating to each coalition   
measured subset of a measurable set   that
can be thought as   without loss of
generality.

where  denotes the Shapley value of

the infinitesimal player   in the game,   is a
perfect sample of the all-player set   
containing a proportion   of all the players,
and   is the coalition obtained after   
joins  . This is the heuristic form of
the diagonal formula.

Assuming some regularity of the worth

function, for example assuming   can be
represented as differentiable function of a non-
atomic measure on  ,  ,   
with density function  ,

with   (   the

characteristic function of  ). Under such
conditions

as can be shown by approximating the density

by a step function and keeping the proportion   
for each level of the density function, and
The diagonal formula has then the form
developed by Aumann and Shapley (1974)

Above   can be vector valued (as long as the

function is defined and differentiable on the
range of  , the above formula makes sense).

In the argument above if the measure contains

atoms   is no longer true—
this is why the diagonal formula mostly applies
to non-atomic games.

Two approaches were deployed to extend this

diagonal formula when the function   is no
longer differentiable. Mertens goes back to the
original formula and takes the derivative after
the integral thereby benefiting from the
smoothing effect. Neyman took a different
approach. Going back to an elementary
application of Mertens's approach from
Mertens (1980):[6]

This works for example for majority games—

while the original diagonal formula cannot be
used directly. How Mertens further extends this
by identifying symmetries that the Shapley
value should be invariant upon, and averaging
over such symmetries to create further
smoothing effect commuting averages with the
derivative operation as above. [7] A survey for
non atomic value is found in Neyman (2002)[8]
 See also[edit]

Looking Ahead

You'll soon be coming to your first live negotiation! Now would be a great time
to start thinking about who you're going to negotiate with. While the Zincit
case isn't until the start of Week 3, it may take you a few days to find two
partners and schedule a time to do the negotiation (in-person or online), and I
don't want your progress through the course delayed. See the Negotiation
Logistics page for options and instructions on how to find a partner. Make
sure at least one of you is prepared to record the negotiation for peer review;
see the How to Record Your Negotiation page for more information. You
should set aside 45 minutes for the actual negotiation and about 30 minutes
sometime beforehand to read the case and prepare your arguments.

That said, please don’t do the negotiation just yet. You should get through the
Merger case and its discussion (Week 2) before attempting the Zincit case.
But please do start planning.

In the next video, I show how to divide the pie when there are three or more
parties in the negotiation. In this situation, I don’t think there is only one fair
answer. The first approach we look at is based on the Shapley Value. It
requires more mathematics, which is why we'll mostly stick to two parties in
the rest of the course. The reading that follows presents a second option,
which is based on the Nucleolus. Here the mathematics is even more
advanced and so, you should think of this as truly optional.

Nucleolus (advanced and very much optional)

I want to be careful that I don’t leave you with the impression that the
Shapley Value is the only fair way to divide the pie. I think it has many
desirable properties, but it isn’t the only option. Here I’ll explain one other
approach, called the Nucleolus (like the largest structure inside the nucleus
of a cell), which was developed by David Schmeidler in 1969.

To explain how the Nucleolus works, let’s take a slightly different version of
the Runway Problem. We’ll have three airlines as before.

A needs a runway of length 12

B needs a runway of length 18

C needs a runway of length 18

Under the Shapley Value approach, we’d say the three airlines would split the
cost of the first length three ways and then B and C, as the only users of the
next half length, would share that cost equally. Thus,

A pays 4

B pays 4 + 3 = 7

C pays 4 + 3 = 7

Before turning to the Nucleolus, we can determine a few properties that any
fair solution should obey.

For starters, since A is using less of the runway than B or C, whatever amount
A pays, it should be no more than what B or C pays.

From this, it follows that B and C should pay the exact same amount, as B
uses no more than C and C uses no more than B.

Combining these two properties, we can conclude the most A should ever pay
is 6. Since B and C must pay at least as much as A, once A pays 6 so must B
and C, and together that covers the full cost of the runway.

The most A should pay is 6. What is the least? Well, it wouldn’t be fair for A to
pay less than 4, as that is its equal share of the cost of the runway it uses.
Therefore, A should pay something between 4 and 6. The Shapley Value has A
paying 4. The Nucleolus makes the argument for why A should pay 6. It has to
do with how much each side gains when one individual (or group) joins
another.

Imagine B and C have already formed a partnership. In that case, the two of
them have already saved 18 by coming together. If A joins them, the three-
way partnership will create another 12 of savings. Under the Shapley Value, A
pays 4 and thus saves 8, while the (B, C) partnership only saves 4. Thus
Airline A gains double what the (B, C) partnership gets. This seems unfair. A
needs the (B, C) group just as much as the (B, C) pair needs A. The Nucleolus
proposes this gain be split evenly, namely 6 and 6, which requires A to pay 6.

You might be wondering why I picked the combination of A joining (B, C). Why
not look at B joining an (A, C) partnership? Indeed, the Nucleolus looks at all
the possible combinations. When B joins (A, C), there is a gain of 18. Using the
Shapley Value approach, B would pay 7 and save 11, while (A, C) would only
save 7. This isn’t equal, either. To make this equal, we’d have to have B pay 9.
By symmetry, C would have to pay 9. But that creates a bigger issue as then A
would pay nothing. We’ve made the asymmetry even worse than in the case
where A joins (B, C). If A pays nothing, then all of the gain goes to A and none
to (B, C).
What the Nucleolus does is finds the division that maximizes the smallest
gain. And once that is done, it maximizes the next smallest gain subject to
not lowering the smallest gain. It isn’t always possible to make all the gains
equal and when it isn’t, the Nucleolus comes as close as possible.

Here’s what I mean. Recall that when A joins (B, C), there is only 12 to go
around. If we split this evenly, A saves 6 which implies it pays 6. And since B
and C must not pay less than A, they pay 6 as well. So, we have a cost
division where A, B, and C all pay 6.

Let’s see how the gains are split in each combination of an individual joining a
pair. We know that the gains from A joining (B, C) are split evenly. When B
joins (A, C), since B pays 6, it gains 12 while (A, C) gains 6. And the same is
true for C when it joins (A, B). We might like to increase how much (A, C) or
(A, B) gains as the divisions are lopsided toward the other party, but to do so
would require that B pays more and, by symmetry, C pays more. If B and C
were to each pay more than 6, then the (B, C) pair would gain less than 6
when A joins them. Thus we can’t make the result for when B joins (A, C)
more fair without making the A joins (B, C) scenario even less fair.

John Rawls argued that society should work to maximize the welfare of its
worst-off members. In a similar vein, the Nucleolus looks to find the cost
division that maximizes the gain to the group that is getting the least from
coming together. And it keeps on doing that to the extent possible.

Let me provide a few more examples.

A needs a runway of length 12

B needs a runway of length 24

C needs a runway of length 24

Under the Shapley Value approach, we’d say that all three airlines would split
the cost of the first length three ways and then B and C, as the only users of
the next length, would share that cost equally. Therefore,

A pays 4

B pays 4 + 6 = 10

C pays 4 + 6 = 10

But under this cost division, when A joins (B, C), A gains 8 and (B, C) only
gains 4. To equalize this, we should have A pay 6. Thus the Nucleolus solution
is:

A pays 6
B pays 9

C pays 9

Unlike our first example, it is not the case here that all three parties split the
cost evenly. Indeed, as the runway needed by Airlines B and C increases, they
pay all of the additional costs. A never pays more than half the cost of the
first length.

And to the extent that the runway needs of B and C decrease (from their
starting point of 18), the three airlines will continue to split the full cost three
ways. For example, with the numbers below, A, B, and C would each pay 5
under the Nucleolus.

A needs a runway of length 12

B needs a runway of length 15

C needs a runway of length 15

Still wondering why it’s fair for A to be paying an equal share of the full
runway cost? The reason is B and C can together create a large amount of
savings without A. Basically, A is very lucky to be joining (B, C) and should be
happy to split the surplus created when it joins this pair.

This becomes even clearer if we add additional airlines that need the longer
runway. Consider this case:

A needs a runway of length 12

B needs a runway of length 16

C needs a runway of length 16

D needs a runway of length 16

Under the Shapley Value, A pays 3, while under the Nucleolus, A pays 4.
Either way, A gets a great deal in joining the (B, C, D) trio. A gains either 9 or
8 while the trio gains 3 or 4. To make the gains as equal as possible, A should
pay 4. (A can’t pay more than 4 as that would mean it pays more than B, C,
and D.)

For our final example, we’ll forgo airport runways for estate settlements. The
Babylonian Talmud provides an illustration for how to divide up an estate in
the face of competing claims. Surprisingly (for a 2,000 year old book), the
unusual solution proposed is the same as the Nucleolus.

Here's the set up. A person dies owing money to three creditors. They are
owed 100, 200, and 300 respectively. These debts are larger than the assets
of the estate, so they can't all be paid off. The table below shows how the
assets should be allocated, according to the Talmud. In the event the estate
only has 100 to pay out, each of the three creditors is paid 33 1/3. If the
estate has 200, A is paid 50, while B and C receive 75. If the estate has 300, A
is paid 50, B is paid 100, and C is paid 150.

It seems like there are three different approaches being taken. The first row
suggests equal treatment, the third row suggests proportional treatment, and
the middle row just looks weird.

Estate Creditor A (100) Creditor B (200) Creditor C (300)

100 33 1/3 33 1/3 33 1/3

200 50 75 75

300 50 100 150

As it turns out, all three rows are consistent with the Nucleolus.

First, look at the case where there is 300 to divide. If (B, C) get together, they
can divide up 200 without any agreement from A. That is because (B, C) could
write A a check for 100 and A would have no more claim. Thus (B, C) can get
200 on their own, but they need to bring A onboard to divide up that last 100.
If they divide it evenly, then A’s gain from joining the group will be 50, the
same as the gain to (B, C). You can check that this is the smallest amount
anyone or pair gets in forming a threesome. For example, (A, B) on their own
can get nothing as if they pay C off, that leaves nothing for themselves. So if
(A, B) want to get anything, they need to bringing C into the group. Similarly, C
can get nothing on its own as paying off A and B would use up all the assets.
Thus bringing C together with (A, B) creates 300 to share. In the proposed
solution, C gets 150 and (A, B) get 150, both of which are much bigger than
50.

The middle row looks more confusing. Here (B, C) can get 100 of the 200
without an agreement from A (again by writing a check to A). Thus, just as in
the last row, the addition of A is worth 100. If A gets 50 and (B, C) gets 50,
then the two gains from joining are equal and they are also tied for the lowest
amount any party gets for joining another. For example, (A, C) can get nothing
on its own, so there is then 200 to split up when B joins (A,C). Here B gets 75
and (A, C) gets 125. To equalize this, B would have to get more and either A or
C get less. But A can't get less as it is only getting 50 when joining (B, C) and
that is already the minimum. If C were to get more than 75, then when C joins
(A, B) that means B would have to get less than 75 (as A is getting 50)—but
then B would be getting less for joining (A, C) than C would be getting.

If we go to the first row, no pair can get anything on their own. Even (B, C)
without A gets nothing as absent an agreement there is no ability to pay A his
claim of 100 and have anything left over. Thus if the payouts were anything
but equal, then whoever got the lowest payout would get less for joining the
other pair. Only when the payouts are equalized do we maximize the smallest
payout.

If you are wondering how the Shapley Value would work in the Talmud case,
just imagine that the three creditors get in line in a random order. Each is
paid off until the money runs out. Thus if the order is (A, B, C) and the amount
is 200, then A gets 100 for being first in line. There's still 100 left and B, as
next in line, gets all of it leaving nothing for C. If the order is (C, A, B) then C
gets 200 while A and B each get nothing. And so on. The Shapley Value is the
average of all these possibilities.

There's one other way of explaining the Nucleolus solution. Recall our
discussion of the Principle of the Divided Cloth. The Nucleolus has the
attractive feature that if we take away one of the players and the amount that
person gets then the other two players divide what's left according to the
Principle of the Divided Cloth. Consider, for example, the middle row. If we
take away A who is paid 50, then B and C have 150 to divide up. since they
are claiming 200 and 300 respectively, each is claiming the entire cloth and
so each is given half or 75. If we remove B with his 75 payment, that leaves
125 for A and C to divide. A is only claiming 100 which concedes 25 to C;
meanwhile C claims 300 conceding nothing to A. Thus 100 is in dispute, and
this is split 50/50. So A gets 50 and C gets 50 plus the conceded 25 for 75 in
total.

I don’t want to pretend this is a rigorous explanation of the Nucleolus, but I

hope I've given you a brief taste of why it is a very reasonable alternative to
the Shapley Value. For more information about the Nucleolus, have a look at
the original article by David Schmeidler and an elegant application of the
Nucleolus to our airport cost-sharing problem by S.C. Littlechild. The
application of bargaining theory to problems from the Talmud starts with
Barry O'Neill in his 1982 paper; the connection to the Nucleolus was
developed by Nobel Prize winner Robert Aumann and Michael Maschler.

Further Reading

Littlechild, S.C. “A Simple Expression for the Nucleolus in a Special

Case.” Int. Journal of Game Theory  3 (1974): 21–29. [LINK = ]
Schmeidler, David. “The Nucleolus of a Characteristic Function Game.” SIAM
Journal on Applied Mathematics 17 (1969): 1163–1170.

O'Neill, Barry. “A Problem of Rights Arbitration from the

Talmud.” Mathematical Social Sciences 2 (1982): 345-371. [LINK = ]

Aumann, Robert J. and Michael Maschler. “Game Theoretic Analysis of a

Bankruptcy Problem from the Talmud.”Journal of Economic Theory 36 (1985):
195-213.

Mastery Quiz 1 – 2

Failed
5/14 questions correct

You haven't passed yet. You need at least 11 questions correct to pass.

Review the material and try again! You have 1 retake every 8 hours.

Review Related Lesson

Incorrect
1. 
Preamble: This is the first mastery quiz for the course. The questions on this
quiz are meant to test whether you have watched all the material and
understand the concepts presented in Modules 1 – 2. If you are reading this, I
hope that means you’ve had a chance to look over the questions in advance
(provided in the Preview of Mastery Quiz 1 – 2) and so you know what to
expect.

Q1. What is the pie?

The pie is the benefit the negotiating parties could get if they work together.

Sorry, that's incorrect. 

The pie is the difference between the benefit the negotiating parties could get
if they work together and the sum of the benefits each party could get on its
own.
 The pie is the difference between the benefit one party can get on its own and
the benefit the other party can get on its own.

3.14159…

Correct
2. 
If Abe and Bea reach an agreement, they can create 12 together. If they don’t,
Abe can create 3 on his own and Bea can create 1 on her own. What is the
pie?

Well done! 

That’s right. The pie is how much more the two parties can create by working
together compared to what they can create without an agreement. Therefore
the pie is 12 - (3 + 1) = 8.

Correct
3. 
In the above scenario, how much should Abe get?

Well done! 

That's right. If Abe and Bea split the pie (8), Abe will get 3 + 4 = 7.

Incorrect
4. 
Andrea and Beth are dining at a fine restaurant. There is a bottle of 2009
Grgich Hills Chardonnay on the menu and the price is $100. To keep things
simple, albeit unrealistic, assume the restaurant only sells whole bottles and
this is the only wine they carry.

 Andrea would be willing to pay $110 to drink the whole bottle.

 Andrea would be willing to pay $90 to drink half the bottle.

 Beth would be willing to pay $80 to drink the whole bottle.

 Beth would be willing to pay $50 to drink half the bottle.

What is the pie, in dollars?

100

Sorry, that’s not what we’re looking for. 

This is a challenging question. Remember the pie is how much more the two
parties can create by working together compared to what they can create
without an agreement. If they don’t reach an agreement, what would Andrea
do on her own? What would Beth do on her own? If they do reach an
agreement how much value do they create? How much more value do they
create together compared to the result with no agreement?

If you are still stuck, you might want to review the Sea Corp. video.

Show acceptable responses

Incorrect
5. 
In the question above, how much should Andrea pay, in dollars, if they split
the pie?

Sorry, that’s not what we’re looking for. 

Andrea needs Beth just as much as Beth needs Andrea to do this deal, so they
should split the pie. If you’ve calculated the pie correctly, then both Andrea’s
and Beth’s gain from sharing the bottle will be half the pie. For Beth, that
means she pays that amount less than her value of the bottle. But that’s not
quite the case for Andrea.

A common mistake here is to leave out the gain Andrea can get on her own.
Remember that if they don’t reach an agreement, Andrea will still buy a bottle
of wine and get some surplus. Thus Andrea has to do even better than that as
a result of the agreement.

Show acceptable responses

Incorrect
6. 
Recall that if Aegean and Baltic share the cost of a new software program,
Aegean will benefit $100 while Baltic benefits $200. If the software costs
$100 total, how much should Aegean pay, in dollars?

Sorry, that’s not what we’re looking for. 

What value can they create if they work together to buy the software? What
will Aegean do on its own? What will Baltic do on its own? How much would
each benefit?

You may find it helpful to fill in the numbers in the table below. I’ve filled in
the last entry, namely the $100 total cost that has to be paid.

Aegean Baltic Total

Net Benefit: Together ------- ------

Net Benefit: On Their Own

Pie ------- ------

Total benefit each side gets when they split the pie

How much each pays 100

Show acceptable responses

Incorrect
7. 
What is the Shapley Value?

For each party in the group, it is the amount of pie created by that party
joining others in the group, averaged across all possible orderings in which
parties join the group.

For each party in the group, it is half of the amount of pie created by that
party joining others in the group, averaged across all possible orderings in
which parties join the group.
For each party in the group, it is the maximum portion of the pie created by
that party joining the group, across all possible orderings in which parties join
the group.

Sorry, that's incorrect. 

Please review video on the Shapley Value.

Incorrect
8. 
In the Planet–Gazette merger, the Gazette was twice as big as the Planet. If
the Planet were the same size as the Gazette, how much more of the pie
would you expect the Planet to get?

No more

50% more

100% more

Sorry, that's incorrect. 

In the original Planet-Gazette case, how is the pie divided between the Planet
and the Gazette? Why? Does that division depend on the relative size of the
Planet?

Incorrect
9. 
Recall in the Planet–Gazette merger case, the increased productivity from the
Gazette’s know-how was worth $1 million to the Planet. Imagine the Planet
could hire a consultant to improve its productivity up to the same level as the
Gazette. The cost of the consultant would be $200,000. Of course, with the
merger, there is no need for the consultant. When the Planet has the ability to
hire a consultant, how much more money should the Planet get in the merger?
The same amount as before

$200,000 more

Sorry, that's incorrect. 

The possibility of hiring the consultant changes the benefit that the Planet
can achieve on its own without the help of the Gazette. What is the new pie
and what is the Planet's new starting position?

$300,000 more

$400,000 more

$500,000 more

Incorrect
10. 
In the case of Rio Tinto and BHP, recall that their market caps prior to the
merger were approximately $160 billion (Rio Tinto) and $240 billion (BHP).
The merger was believed to create $30 billion of synergies in present
discounted value (PDV). How much more could Rio Tinto hope to get by using
the theory of the pie instead of proportional division?

$1 billion

$2 billion

$3 billion
$5 billion

$10 billion

Sorry, that's incorrect. 

First, what is the pie? How much would Rio Tinto get under proportional
division? Hint: $160b / ($160b + $240b) = 40%. How much more does Rio Tinto
get if they split the pie evenly?

Incorrect
11. 
Consider an Ultimatum Game where the pie is $100. You are the receiver.
What reserve price maximizes your expected payout?

Sorry, that’s not what we’re looking for. 

Let’s try an example. What if your reserve price is $50? Does this maximize
your expected payout? Well, if someone offers you $49, you’ll turn it down. By
comparison, how would you do with a reserve price of $49?

If the other side offers you $50 and your reserve price is $49, you accept and
you still get $50! So that's a tie. But if the other side only offers you $49, now
you accept it and get $49 rather than turn it down and get nothing.

Follow this logic and try again.

Show acceptable responses

Correct
12. 
In an Ultimatum Game where the pie is $100, would you rather be:

the person making the offer

Well done! 
Remember the old adage: It is better to give than to receive. You would rather
be the one making the offer since that person should get more than half of the
pie. The advantage of being the one receiving the offer is you can guarantee
yourself some money by saying yes to everything.

the person receiving the offer

Correct
13. 
You should propose proportional division if it benefits you.

Yes

Well done! 

If a proportional split leads you to get more than half the pie and the other
side is willing to agree, then go ahead.

No

Correct
14. 
Abe and Bea each have some money to invest in a CD (Certificate of Deposit).
Abe has $5,000 and Bea has $20,000. Both are interested in making a 6-month
investment at Synchrony Bank. The CD rates for Synchrony Bank (as of July 8,
2015) are as listed below.
With 0.41% interest, Abe would get $5,010 in six months. With 0.50% interest,
Bea would get $20,050 at the end of six months.

If they pool their funds, they will be able to purchase a $25,000 CD, which
pays a higher interest rate. The 0.60% interest will return $25,075 at the end
of six months.

Obviously, Abe gets back his $5,000 principle, and Bea gets back her $20,000
principle. How should the $75 interest be divided between the two of them?

Divide up the interest according to the amount invested. Since Bea has 80%
of the funds, she should get 80% of the interest, or $60 in total. This is the
same as both parties getting 0.60% interest on their funds.

Divide the interest in two, so each gets $37.50.

Abe gets $17.50 and Bea gets $57.50.

Well done! 
If they don’t pool their funds, then Abe will only earn $10 of interest and Bea
will earn $50. By coming together, they can earn $75, which is an extra $15 of
interest. The two should spit this evenly, $7.50 and $7.50. Thus Abe would get
$17.50 and Bea would get $57.50.

Note that this increases Abe’s effective interest rate from 0.41% to 0.7%,
which is more than what Bea is getting. The reason is that Bea is not able to
increase her payout from 0.50% to 0.60% without Abe’s cooperation. Were
Bea able to find someone else with $5,000 to invest with her, then she would
likely get much more of the gain.

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