2. If you go to arbitration and offer $13 million, what is the expected cost of the contract? When a buyer and seller are negotiating a price, at times the process hits an impasse: The seller wants a higher price, but the buyer is adamant about paying a lower one. In these cases, the buyer and seller may turn to arbitration.

Sometimes each side of the dispute selects one person to serve on an arbitration panel, and the two arbitrators select a third to complete the panel. At other times, one neutral arbitrator is chosen to hear the case.

Both sides of the controversy present their arguments and their offers to the arbitrator (whether an individual or a panel), who renders a decision. Often the arbitrator

“splits the difference” by selecting a price between the two offers. In some arbitrations, the two sides must accept the decision; in others, the decision is advisory, and one or even both sides can reject it and resume negotiations.

In one type of arbitration, however, the arbitrator is not allowed to split the difference, and the buyer or seller must accept the judgment. In this arbitration, called final offer arbitration, the arbitrator selects one of the offers and cannot change it. Several states require final offer arbitration between management and public-sector unions that legally are forbidden to strike, such as police, prison guards, and firefighters. Major League Baseball (MLB), a professional baseball organization consisting of 29 teams in the United States and 1 team in Canada, also uses final offer arbitration. When an MLB player and the owners of his team cannot agree on a salary, final offer arbitration is a mechanism for resolving salary disputes.1 The player is entitled to put the dispute before a three-person arbitration panel. The three arbitrators are neutral; that is, none of them will favor one side or the other. Both sides submit their “final” offers, along with supporting documents, to the arbitrators. The arbitrators take the midpoint between the team’s offer and the player’s demand. If the evidence shows that the player’s market value is higher than the midpoint, the panel awards the higher salary demanded by the player.