Negotiation, Mediation, and Arbitration

The term negotiation conjures up a variety of images in people’s minds, most notably deal making and dispute resolution. Indeed, individuals negotiate job assignments, supplier contracts, joint ventures, and the resolution of conflict in the workplace. Whether applied to crafting deals or resolving disputes, negotiation refers to a joint decision-making process in which two or more parties, whose interests conflict, attempt to reach an agreement. When negotiations become difficult or impossible, and when the costs of disagreement are high, others often intervene. These third parties typically act as mediators or arbitrators as they assist negotiators in reaching agreement.

Negotiation, mediation, and arbitration are therefore distinct but related processes. An important difference among them, however, is in the degree of control individuals have over the process (i.e., how they come to agreement) and over the outcome (i.e., what agreement they reach). In negotiation, parties generally have a high degree of control over both process and outcome. For example, job candidates and recruiters work together through discussion and exchange of offers in an attempt to craft an agreement that is mutually acceptable.

When third parties become involved, however, negotiators (or disputants) relinquish some control for the sake of reaching agreement. In mediation, they give up control over the process, and in arbitration they give up control over the outcome. In other words, mediators work with the parties to help them develop and endorse an agreement, whereas arbitrators listen to the parties and impose a decision.

The study of negotiation and third-party processes has a long and somewhat fragmented history. In part, this complicated past arises from differences in the nature of the processes themselves and their objectives, as well as differences in their intellectual traditions. Not surprisingly, each has its distinct challenges; together, though, they promote processes designed to help individuals with diverse preferences work together to enhance individual and organizational effectiveness.


Because of its link to deal making, negotiation is often conceptualized primarily in economic terms. Economists, some of the first scholars to study the topic, tend to adopt a prescriptive approach; that is, they analyze the outcomes that should result assuming that negotiators act rationally. From this perspective, negotiators are often believed to be Olympian, meaning that they are fully informed, having perfect information about their preferences, their counterpart’s preferences, the possible outcomes, and the expected utility or value associated with those outcomes. They are also believed to be motivated exclusively by self-interest, striving to make choices that maximize their individual outcomes.

Psychologically oriented researchers have challenged this perspective, pointing out that it fails to capture the experiences of negotiators and the complexity of their motivation. In reality, negotiators rarely know their counterpart’s preferences and sometimes are even unsure about their own preferences, which may shift during the course of a negotiation. Moreover, negotiators are often concerned about the other party’s outcomes as well as their own, suggesting that self-interest is not the only motivation.

Other perspectives have emerged, most notably cognitive and behavioral perspectives that are primarily descriptive and emphasize negotiator aspirations, perceptions, and behavior. Unlike the traditional economic approach, these perspectives focus on conflict situations as they are understood by actual negotiators who often have incomplete and perhaps biased information, limited cognitive capacity to remember facts and imagine possible alternatives, and multiple (often conflicting) motives. Psychological approaches analyze negotiation from a negotiator’s point of view and identify the main tasks of negotiation.

Cognitive and Behavioral Perspectives

To analyze negotiation from a negotiator’s point of view, two important questions need to be asked. First, what is the negotiators’ best alternative to a negotiated agreement (BATNA)? Figuring out a negotiator’s BATNA places a boundary on the negotiation and establishes a reservation point, which is the point at which a negotiator is indifferent between settlement and impasse. Because negotiators are unlikely to accept offers that are less attractive than their best alternatives, it is important to know the parties’ reservation points.

Second, what are the negotiators’ interests? That is, what are the reasons behind the positions they take in a negotiation? Consider a job candidate who asks a recruiter for a $10,000 increase in starting salary because of a desire to pay down substantial educational loans. The candidate’s interest is in paying down the loans, whereas the specific position the candidate has taken is for a $10,000 increase in starting salary. Additionally, the candidate indicates that the starting date is relatively unimportant in comparison to the financial issues. This difference in the relative importance of issues suggests certain tradeoffs or concessions the candidate might make during the negotiation.

Taken together, the assessment of the negotiators’ BATNAs and interests create the structure or psychological context of the negotiation. It is within this structure that negotiators attempt to craft mutually acceptable agreements.

The Two Tasks of Negotiation

Working within this psychological context, negotiators face two primary tasks, namely distribution and integration. Distribution refers to the division of existing value or resources. When managers haggle over the size of their budgets, they are negotiating the division of a fixed resource or “pie.” To reach a mutually agreeable settlement, negotiators generally engage in a give-and-take process and settle on a compromise. Because of the nature of the distribution task, tough bargaining tactics are commonplace, including misrepresentation, bluffing, silence, extreme positions, and threats to walk away. Distribution represents the competitive or win-lose aspect of negotiation.

Integration contrasts sharply with distribution and refers to the creation of additional value or resources. By discovering tradeoffs that meet both parties’ needs, for example, negotiators increase the resource pie and create more value as a result of cooperating and working together. In general, when a negotiation involves multiple issues, which are valued differently by the parties, there is the potential for integration. For example, when organizations subsidize employee health club memberships, they are attempting to increase employee health and well-being as well as increase employee productivity, a tradeoff that is intended to create value. In general, integrative agreements that are created out of complementary interests tend to support and even strengthen long-term relationships between parties.

Although desirable, integration is not an easy task. To create integrative agreements, negotiators need to know each other’s interests and be motivated to work creatively to meet each other’s needs. Not surprisingly, integrative negotiations are often referred to as joint problem solving. Because of the nature of the integration task, cooperative bargaining tactics, including honesty, openness, information sharing, and trust, are commonplace. Integration reflects the cooperative aspect of negotiation.

Negotiations that involve both integration and distribution are called mixed-motive negotiations, primarily because they include both cooperative and competitive aspects. In general, most negotiations are mixed-motive. Even a negotiation such as buying an automobile, which may seem to be a purely distributive task, typically involves integration as well as distribution. For example, at some point in the negotiation, one of the parties may begin to expand the set of issues beyond price, to include such things are financing, new tires, floor mats, sound-system upgrades, extended warranty, and other issues that may be valued differently by the two parties. By adding issues to the negotiation, the resource pie increases; however, these added resources still need to be divided between the buyer and seller.

Perhaps one of the greatest challenges for disputants is to realize the integrative potential in their negotiations and to create mutually beneficial agreements. Many disputants feel uneasy about sharing information about their interests, which is an important part of identifying complementary interests and creating integrative agreements. In cases of protracted union-management negotiations, for example, the low level of trust between the parties may cripple integrative bargaining.

There are several cognitive biases that hamper effective integrative bargaining, most notably the mythical fixed pie perception. According to this perceptual bias, negotiators assume from the start that their interests and those of their counterpart necessarily and directly conflict. This initial win-lose bias, along with its associated tough tactics, heightens the competitive aspect of negotiation and hampers a problem-solving approach. For example, because of the mythical fixed pie perception, negotiators often misperceive shared interests as conflicting, leading them to overlook areas of mutual benefit.

When Others Intervene: Mediation and Arbitration

When two parties run into trouble and can no longer manage their negotiation, they often turn to a neutral third party for help. For example, negotiations may become tense and difficult, creating frustration, anger, and distrust, or they may just stall because the parties lose momentum or direction, or find themselves at an impasse on critical issues. Sometimes third-party intervention is an informal process, such as when two employees turn to a respected coworker or to their manager for help in resolving a dispute. Other times it is part of an organization’s formal dispute resolution system, in which case it may be either voluntary or required.

In general, third-party intervention is designed to get negotiations back on track. At a minimum, it brings negotiators back to the table and provides a cooling-off process for highly emotional negotiations. It also can reestablish and refocus communication on the substantive issues and impose or reinforce deadlines designed to keep the negotiation moving forward.

Neutral third parties may also help negotiators resolve the substance of their conflicts. Mediators, who take control of the process, work with the parties both to repair strained relationships and to help them develop and endorse an agreement; mediators meet with parties individually, gaining an understanding of the various issues and perspectives, and identify—and help the parties develop—possible agreements.

Arbitrators, who take control of the outcome, help negotiators primarily by providing a solution. Thus, the goal of arbitration is to design settlements. In general, the arbitrator hears each party’s case and then decides the outcome; however, there are several forms of arbitration. In binding arbitration, for example, the parties agree beforehand that they will accept any resulting settlement an arbitrator designs. In final-offer arbitration, parties submit their preferred agreements, one of which is selected by the arbitrator.

Mediation and arbitration may also be combined to create hybrid processes. In some organizational dispute-resolution systems, mediation is a preliminary step leading to arbitration if an agreement is not reached. The reasoning behind this “med-arb” procedure is that if the parties cannot craft a solution themselves with the help of a mediator, then the dispute automatically goes to arbitration (i.e., the mediator becomes an arbitrator) and is resolved for them.

Another hybrid process is “arb-med,” which consists of three phases. In the first phase, the third party holds an arbitration hearing and places the decision in a sealed envelope. This phase is followed by mediation, during which the arbitrator’s envelope (i.e., decision) is prominently displayed. If mediation fails, the envelope is then opened, revealing the arbitrated decision. When comparing these two hybrid processes, arb-med resulted in more mediated settlements and in settlements of greater joint benefit.

Like negotiation, mediation and arbitration can be extremely effective ways of resolving disputes. As mentioned above, when negotiations are tense and emotional, or if the parties reach an impasse and cannot themselves figure out a solution, it may be wise to involve a neutral third party. It can also offer the parties a way to save face by allowing them to make concessions during mediation without appearing weak, or letting them blame an arbitrator if the settlement is unsatisfactory to a party’s constituents. Research shows that it is best to involve third parties only after negotiators have made a serious effort to resolve their own conflict and when they realize that they can no longer manage their negotiation. The use of third parties is particularly helpful for managing conflicts in ongoing work relationships.

Researchers also point out some important challenges, however. Turning to third parties, especially to arbitrators, usually signals that the negotiation process has failed and that the parties could not settle their differences themselves. In the case of ongoing work relationships, this failure can be problematic. Organizations generally prefer that workers become skilled in managing their relationships, even strengthening them to benefit the organization.

Additionally, because arbitration involves imposing a settlement on the parties, there may be less commitment to the settlement than if the parties crafted an agreement themselves. The process may also inadvertently create systemic problems. For example, merely anticipating arbitration may inhibit serious negotiation, especially when both parties feel strongly about their positions and believe that a neutral third party will side with them. Such overconfidence may undermine the negotiation process and needlessly escalate conflict. It may also jeopardize the parties’ acceptance of the arbitrated decision.

One of the biggest challenges for neutral third parties is being perceived as neutral by both sides. To be effective, third parties need to be acceptable to both parties and perceived to be unbiased. This may be very difficult to achieve. For example, mediators require discretion: Even when feeling strongly about one party’s proposal, they risk undermining the process by appearing to side with one party. They must be careful not to systematically favor one side or they may compromise their image of fairness and impartiality.


Negotiation and third-party processes are part of everyday life in organizations. Work group members negotiate task assignments and days off, and prospective employees negotiate the terms of their new jobs. When negotiation stalls, third parties often step in and assist. Mediators take control of the process, attempting to help the parties find a mutually acceptable agreement. Arbitrators, who take control of the outcome, listen to the parties and then decide on a settlement. Negotiation, as well as third-party processes, has shortcomings. However, despite these challenges, these processes serve to help individuals with diverse preferences work together to enhance individual and organizational effectiveness.


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