The Market as Negotiation

Abstract

Our economic system counts on markets to allocate most of our societal resources. The law often treats markets as discrete entities, with a native intelligence and structure that provides clear answers to questions about prices and terms. In reality, of course, markets are much messier—they are agglomerations of negotiations by individual parties. Despite theoretical and empirical work on markets and on negotiation, legal scholars have largely overlooked the connection between the two areas in considering how markets are constructed and regulated.

This Article brings together scholarship in law, economics, sociology, and psychology to better understand the role that negotiation plays in different types of marketplaces. Establishing the concept of negotiation variance, we create a preliminary taxonomy of factors that shape such variance and examine the differences between markets as to the effects that negotiation can have on transactions. In markets with high negotiation variance, parties can use their negotiation effectiveness to get much better deals. Although the law has not generally recognized negotiation’s role in markets explicitly, judges and policymakers have at times taken negotiation variance into account implicitly, making exceptions to standard doctrines to accommodate unbalanced outcomes. The Article examines the doctrines of common-law contract that reflect an understanding of negotiation’s impact, as well as exploring three particular markets where high-variance negotiation has a significant role: lawsuit settlements, corporate control, and employment. These examples show how the law takes negotiation variance into account and illustrates the challenges in developing a response to individual negotiation differences across markets.

Keywords: negotiation, markets, market price, contract law, appraisal rights, psychology

JEL Classification: D40, D86, K12, K22, K31, K41