9781118041581

In negotiating a contract, firm A and firm B are considering three options. Firm A can

supply firm B with a 97% pure compound, a 98% pure compound, or a 99% pure com-

pound. Raising purity by 1% increases firm A’s cost by $50,000. Firm B’s potential prof-

its are $200,000, 280,000, and $320,000 for the 97%, 98%, and 99% compounds. Which

of the three options constitutes an efficient agreement (i.e., that maximizes the parties’

total value or “pie”)? Why?

642 Chapter 15 Bargaining and Negotiation

CHECK

STATION 4

Wooing David

Letterman

Revisited

In 1993, David Letterman faced the most difficult decision of his life. Should he

agree to a renegotiated contract with NBC or take a new path and move to CBS?

In the early 1990s, NBC’s unbeatable late-night lineup, The Tonight Showwith

Johnny Carson and Late Night with Letterman, accounted for huge net revenues

of some $100 million per year. But in 1992 NBC chose the comedian Jay Leno,

instead of Letterman, to succeed Johnny Carson as the host of The Tonight Show

in an effort to keep its lock on late-night programming. Accordingly, CBS, a

nonentity in late-night television, saw its chance to woo David Letterman to a

new 11:30 P.M. show on its network. After extensive negotiations, CBS offered

Letterman a $14 million salary to do the new show (a $10 million raise over his

salary at NBC). In addition, Letterman’s own production company would be

paid $25 million annually to produce the show. (By comparison, NBC produced

The Tonight Showin house at an annual cost of $15 million.)

However, NBC was unwilling to surrender Letterman to CBS without a fight.

The network entered into secret negotiations with Letterman’s representative,

TABLE 15.1

A Multiple-Issue

Procurement Contract

A contract calling

for 80 engines to be

delivered in three

years provides the

greatest total profit

($15 million) to the

parties.

(a) The Firm’s Costs (Millions of Dollars)

Time of Delivery

Number of Engines 2 Years 3 Years 4 Years

40 40 38 36

60 61 55 51

80 78 70 65

(b) Department of Defense Values (Millions of Dollars)

Time of Delivery

Number of Engines 2 Years 3 Years 4 Years

40 50 46 42

60 72 69 63

80 90 85 78

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