The effect of negotiators’ role, leadership tone, and social value orientation on expected transfer prices: additional evidence

Abstract

This study examines the effect of negotiators’ role (sellers vs. buyers), leadership tone (supportive vs. non-supportive), and social value orientation (prosocials vs. proselfs) on expected transfer prices outcomes as expressed by negotiation managers. Using a 2 × 2 experiment, we find that prosocial managers’ expected transfer prices are closer to an equal-profit price compared with those of proself managers. We further find that the transfer price expectation gap between proself selling managers and buying managers under a non-supportive leadership tone is larger than it is under a supportive leadership tone, suggesting that the negative effect of prosel.

Appendix: A sample of one of the experimental conditions

[Negotiator’s role = Seller; Leadership tone = Non-supportive]

1.1 Organizational structure

XYZ is a medium-size manufacturing company which has the following two operating divisions:

• 1. PARTS division which manufactures parts for use by ASSEMBLY division and also for sale to outside buyers, and.

• 2. ASSEMBLY division which buys parts from the PARTS division and from outside sellers, and assembles them into Final Product for sale to outside customers.

1.2 Your role

You are to assume the role of Manager P of the PARTS division of XYZ Company.

1.3 Your workplace

At an executive meeting several years ago, senior management of XYZ called for ideas on how to increase work productivity. A manager suggested one way of increasing work productivity was to have good working relationships with other employees within the company.

Senior management disagreed with this view, declaring that the promotion of work relationships within the company was irrelevant to increasing productivity and that employees should concentrate on the work at hand instead of wasting time socialising. Senior management felt that they should be the ones setting the pace of the environment and took it upon themselves to implement a system of performance review that focused on meeting individual goals set by senior management.

A recent survey carried out in XYZ showed that most employees were unhappy and uncomfortable within the company. They did not feel valued and felt remote both within their own division and with colleagues in other divisions.

At the moment, you rarely interact with Manager A of the ASSEMBLY division.

1.4 Your total compensation

Your performance is assessed by senior management based on your division’s performance and efficiency. Your total compensation consists of a fixed salary and a bonus. The bonus is tied to your division’s profits.

This year, your division manufactured several batches of parts called Alpha. You can sell Alpha either to the ASSEMBLY division or to outside buyers (see diagram below).

The transfer price that you receive when you sell Alpha to ASSEMBLY is negotiated by you and Manager A, the manager of ASSEMBLY division. Both of you are free to consider whatever factors are appropriate in setting the price and to choose a transfer price for Alpha that is satisfactory to both of you.

If you and Manager A cannot agree on a price, you can always sell to outside buyers and ASSEMBLY can buy from outside sellers. You will, however, each incur extra fixed costs when you trade with outsiders that you do not have when you trade internally.

Trading with outsiders:

$$ \begin{array}{*{20}c} {{\text{PARTS}}} & {{\text{Price }} + {\text{ fixed }}\;{\text{Marketing }}\;\cos t \, \left( {{\text{collection }}\;{\text{expenses}},\;{\text{ advertising}}} \right)} \\ {{\text{ASSEMBLY}}} & {{\text{Price }} + {\text{ fixed }}\;{\text{Purchasing}}\;{\text{ cost }}\left( {{\text{quality}}\;{\text{ testing}},\;{\text{ purchasing}}\;{\text{ division}}\;{\text{ costs}}} \right)} \\ \end{array} $$

You already know how much Final Product will sell for on the market, so once you and Manager A decide on the transfer price, both will know how much profit each division will make on this transfer. The table below shows the total profit from trading per part of Alpha and how this profit is divided at selected transfer prices, in thousands of dollars.

See Table

Table 4 Transfer prices and divisional profits. total company Profit = Parts + Assembly = $600,000

4

As you can see, in the absence of outside costs, the total company profit to be divided between the two divisions is $600,000. If the transfer price is agreed at $200 per part of Alpha, then all $600,000 goes to ASSEMBLY whereas at $800 per part of Alpha, all $600,000 goes to PARTS. At prices between $200 and $800 per part of Alpha, the profit is divided, as shown in Table 4. The exact transfer price has no impact on total company profits of $600,000 but affects how it is split between the divisions.

From Table 4, you can also see that every $25 difference in transfer price changes divisional profits by $25,000. Therefore, a change in the transfer price will change division profits in $25,000 increments.

For example, if you negotiate (in dollars).

Transfer Price	Your Division’s (PARTS) Profit	ASSEMBLY Division’s Profit
475	275	325
500	300	300
525	325	275

If both of you cannot agree on a transfer price, both divisions will trade with outsiders at the current market price of $700 per part of Alpha. That is, PARTS will get $700 per part of Alpha selling to outsiders, and ASSEMBLY will pay $700 per part of Alpha buying from outsiders. If an agreement had been reached at $700, then according to Table 1, the $600,000 profit would be split $500/$100. IN the absence of agreement, transacting with outside means outside costs will be incurred, and profits will be reduced as follows:

$$ \begin{array}{*{20}c} {{\text{PARTS }}\;{\text{Profit}}} & {\$ 500,000 \, \;{\text{minus outside }}\;{\text{marketing }}\;{\text{costs}}} \\ {{\text{ASSEMBLY}}\;{\text{ Profit}}} & {\$ 100,000\;{\text{ outsideminus}}\,{\text{ purchasing }}\;{\text{costs}}} \\ \end{array} $$

Failure to reach an agreement will thus result in overall company profits (and aggregate divisions’ profits) being lower due to the outside costs incurred. PARTS and ASSEMBLY are about the same size in terms of invested capital and divisional profit, and the price of Alpha is important to both divisions. PARTS’ production costs and ASSEMBLY’s assembling costs for Final Product are approximately equal.

Think about the profit your division is likely to attain and the level of profit you can get Manager A to accept, given outside market opportunities. This should give some idea as to what price YOU would aim at in negotiating with Manager A.

Assuming agreement is reached, what would you expect the final negotiated (expected) transfer price to be? (You may choose a price between $200 – $800 from the table).

1.5 Manipulation check questions

• 1. What role did you take when completing the experimental task?

  • A. I was the PARTS manager

  • B. I was the ASSEMBLY manager

• 2.Based on the business environment of XYZ, the company:

  • A. Supports maintaining a good relationship and/or relationship building within the company

  • B. Does not support relationship building within the company

• 3.Your bonus depends on:

  • A. Divisions’ profit levels

  • B. Company profit levels

1.6 Fairness concerns scale

Please respond to each of the following questions by circling a number from 1 to 5.

	Strongly disagree	Strongly agree
1	Managers who act cooperatively should be rewarded	1	2	3	4	5
2	Managers who do not act cooperatively should be punished	1	2	3	4	5
3	Managers who act in the common interest should be rewarded	1	2	3	4	5
4	Managers who act in the common interest should get a fair return	1	2	3	4	5
5	If managers are fair with me, I would be fair in return	1	2	3	4	5

1.7 Social value orientation scale

In this task, we ask you to imagine that you have been randomly paired with another person, whom we will refer to simply as the "Other." This other person is someone you do not know and that you will not knowingly meet in the future. Both you and the "Other" person will be making choices by circling either the letter A, B, or C. Your own choices will produce points for both yourself and the "Other" person. Likewise, the other's choice will produce points for him/her and for you. Every point has value: The more points you receive, the better for you, and the more points the "Other" receives, the better for him/her.

Here's an example of how this task works:

$$ \begin{array}{*{20}l} {} \hfill & {\text{A}} \hfill & {\text{B}} \hfill & {\text{C}} \hfill \\ {{\text{You}}\;{\text{get}}} \hfill & {500} \hfill & {500} \hfill & {550} \hfill \\ {{\text{Other}}\;{\text{gets}}} \hfill & {100} \hfill & {100} \hfill & {300} \hfill \\ \end{array} $$

In this example, if you chose A, you would receive 500 points, and the other would receive 100 points; if you chose B, you would receive 500 points and the other 500; and if you chose C, you would receive 550 points and the other 300. So, you see that your choice influences both the number of points you receive and the number of points the other receives. Before you begin making choices, please keep in mind that there are no right or wrong answers–choose the option that you, for whatever reason, prefer most. Also, remember that the points have value: The more of them you accumulate, the better for you. Likewise, from the "other's" point of view, the more points s/he accumulate, the better for him/her.

For each of the nine choice situations below, circle A, B, or C, depending on which column you prefer the most. Please proceed in the order the choices appear.

		A	B	Ct
1	You get	480	540	480
	Other gets	80	280	480
2	You get	560	500	500
	Other gets	300	500	100
3	You get	520	520	580
	Other gets	520	120	320
4	You get	500	560	490
	Other gets	100	300	490
5	You get	500	490	560
	Other gets	500	90	300
6	You get	500	500	570
	Other gets	500	100	300
7	You get	510	560	510
	Other gets	510	300	110
8	You get	550	500	500
	Other gets	300	100	500
9	You get	480	490	540
	Other gets	100	490	300