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Humans routinely cooperate with their fellow humans. Two individuals can often do better by working together rather than alone. However, a persistent issue is, has and always will be how to split up the gains associated with cooperation. Yale University economist Barry Nalebuff tackles this issue in his book “Split the Pie” and offers a general solution that is often applicable.
If two parties envision a gain from cooperation, they should first agree on the precise magnitude of that gain. Then, split it equally. In a negotiation, the pie is how much more they earn if they work together. If either party doesn’t agree, they don’t get the extra pie. In other words, start with ground rules about sharing the pie, seek to expand the pie, see how much working together expands the pie and then split the pie equally.
Nalebuff gives an example of eating pizza. Alice wants 4 slices at $3 a slice; Bob wants 2 slices at the $3 price. However, for $18, they can get a 12-slice pizza. By pooling their resources, they double the pie. Nalebuff argues that the relevant negotiation is over the additional pizza they garner through cooperation. He argues that Alice and Bob should split the extra 6 slices equally.
Nalebuff used his “Split the Pie” negotiation technique when an internet troll tried extorting him. Nalebuff filed a trademark without hiring a lawyer and hadn’t secured the URL that went with the trademark. When he tried to buy the URL, he found that the troll had recently purchased it, claiming he didn’t know that the domain was related to Nalebuff’s trademark. The troll then offered to sell the domain to Nalebuff for $2,500. Nalebuff was willing to pay $5,0000 to $10,000 for the domain.
The nonprofit organization ICANN manages the internet domain names, and according to ICANN rules, the troll registered in bad faith. Nalebuff could go through ICANN’s dispute resolution process for $1,300 and was virtually guaranteed to get the domain, especially since the troll had lost in three previous disputes. Nalebuff reasoned that the negotiation was about the $1,300 fee. Nalebuff explained the “Split the Pie” philosophy and offered to split the $1,300 fee, each getting $650. The troll agreed since his alternative was $0.
Nalebuff’s strategy is simple and practical: Expand the pie and split the gains.•
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Bohanon and Horowitz are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.
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