Summary 661B’s Values S’s Costs
3 Years 5 Years 3 Years 5 Years
95% 180 100 140 80
80% 160 60 90 50No biochemists 00 00
Biochemists 30 30 40 20Lending the biochemists is purely an additive factor; doing so reduces
B’s value but also reduces S’s cost. For example, a three-year contract for
a 95 percent pure hormone with the loan of the biochemists has a value
to B of 180 30 150 and a cost to S of 140 40 100.
a. With three issues (two outcomes each), there are eight possible
contracts. Which contracts are inefficient (i.e., produce worse
outcomes for both sides than some other contract)?
b. Given that dollar-for-dollar compensation can be paid between the
parties, which of the eight contracts is optimal? Explain.- Firm A seeks to acquire (privately owned) firm T whose ultimate dollar
value is uncertain because of its possible liability for the past production
of hazardous waste. The table shows A’s and T’s respective values (in $
millions) for the firm conditional on whether the firm is found to be
liable. Note that A and T have different contingent values and different
probability assessments (shown in parentheses) as to T’s liability. Both
firms are risk neutral.
Value of Firm T
T Not Liable T Liable
A’s Value 50 (.5) 20 (.5)
T’s Value 40 (.8) 30 (.2)a. Firm A is hoping to acquire T in a 100 percent cash transaction. Is a
mutually beneficial 100 percent cash transaction possible? Explain.
b. Instead, suppose that firm A considers acquiring T, paying all or in
part with its own stock. (The owners of T are prohibited from selling
the stock they receive for two years.) If A acquires T and subsequently
T is found liable, both sides expect that A’s stock price will fall by 50
percent. Is a mutually beneficial 100 percent stocktransaction possible?
(Provide an example to show whether the answer is yes or no.)c15BargainingandNegotiation.qxd 9/26/11 11:03 AM Page 661