Hitting the sweet spot when striking a deal

Prof. LENG Mingming 

Negotiating for ‘fair’ deals is a central preoccupation of anyone working in business or politics. But what exactly is fair? And how can the benefits arising from a deal be shared out, so that everyone involved feels content with their lot?   

Determining the most effective answers to these fundamental questions has been the focus of much of the research work conducted by Professor Leng Ming-ming, Lingnan’s Dean of the Faculty of Business. Throughout the course of his career, stretching back to his days as a PhD student, Professor Leng has based this work on cooperative game theory (CGT). Though applicable in many areas, CGT is particularly popular with scholars of economics, applied mathematics, and, Professor Leng’s own field, management science.

In commercial transactions, CGT considers the situation in which two or more persons or players seek to work together to achieve a profit or cost savings. Their willingness to cooperate will depend on two conditions being met: each player must be better off; and each player is happy with the allocation of benefits. Situations do arise, where, even though a player would be better off collaborating, they feel their share of the benefits would be unfairly small.

However, CGT doesn’t hold that proportionality is the most effective or fairest way to assess a contribution to the enterprise. Take the example of a political body in which 51 per cent of the votes are required to pass proposals, and Party A holds 50 percent of the seats, Party B, 30 percent, and Part C, 20 percent. Party A clearly holds the most power, as any other party must partner with it to win a majority. But the other two parties effectively have equal power, despite holding unequal proportions of the seats.

This analysis also reflects the central conclusion of Professor Leng’s research into the application of CGT in business studies. The most effective way for someone to negotiate is to highlight their contribution to a proposed coalition - and if they are offering a larger contribution, they are likely to request a bigger allocation of the benefits. However, Professor Leng and CGT hold that each person’s allocation should be consistent with their marginal contribution. Marginal contribution is the difference between the coalitional value with them involved and the coalitional value without them. This has become the most commonly used basis for allocating benefits. In the political example, above, the marginal contributions of Party B and Party C are symmetrical.

Professor Leng has taken a particular interest in applying CGT to real-world problems. As competition makes everyone poorer, businesses today are keen to find win-win solutions in negotiations.

Though supply chains have existed down the ages, modern digital technology has enabled supply chain management processes to become faster, more efficient and cheaper – as well as much more complex. Given that wholesale price is commonly used to allocate profits to those involved in a supply chain, in several of his papers Professor Leng has used CGT as a means to arrive at wholesale pricing decisions.

To know more about Prof. LENG Ming-ming research projects, please click Lingnan Scholars.