Barry Nalebuff Presenation Slides
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The document presents a guessing game where players guess a number between 1 and 100 with varying prize amounts based on their guess accuracy. It also discusses cost-sharing scenarios for airfare between two parties, detailing different splitting methods and their implications. Additionally, it explores various negotiation scenarios, including mergers and joint purchasing, emphasizing the importance of equitable distribution of potential gains.
Barry Nalebuff Presenation Slides
- 2. 2 A GUESSING GAME I’ve picked a number between 1 and 100 You get 5 guesses. If you are correct on 1st guess, you get $100 If you are correct on 2nd guess, you get $80 If you are correct on 3rd guess, you get $60 If you are correct on 4th guess, you get $40 If you are correct on 5th guess, you get $20 Game is real
- 3. 3 A GUESSING GAME Hint: Each time, I’ll say if you’re too high or too low
- 4. 4 My Prediction 50 25 37 43
- 5. 5 48
- 6. 6
- 11. 11 Dividing Costs Negotiation
- 12. 12 AIRFARES ¤ Split the total $1,243 » Houston pays $1,409 » SF pays $1,409 $666 $909
- 13. 13 $666 $1,243 $909
- 14. 14 AIRFARES ¤ Split the total $1,243 » Houston pays $1,409 » SF pays $1,409 $666 $909
- 15. 15 AIRFARES ¤ Split Houston leg » Houston pays $666 + $909/2 = $1,120.50 » SF pays $1,243 + $909/2 = $1,697.50
- 16. 16 $666 $1,243 $1,243 $454.50 $4$5646.560 $454.50 $454.50
- 17. 17 AIRFARES ¤ Split Houston leg » Houston pays $666 + $909/2 = $1,120.50 » SF pays $1,243 + $909/2 = $1,697.50 ¤ Split costs proportionally » Houston pays 1,332/(3,818)*2,818 = $983 » SF pays 2,486/(3,818)*2,818 = $1,835
- 18. 18 AIRFARES ¤ Split Houston leg » Houston pays $666 + $909/2 = $1,120.50 » SF pays $1,243 + $909/2 = $1,697.50 ¤ Split costs proportionally » Houston pays 1,332/(3,818)*2,818 = $983 » SF pays 2,486/(3,818)*2,818 = $1,835
- 19. 19 AIRFARES ¤ Split Houston leg » Houston pays $666 + $909/2 = $1,120.50 $1,243 » SF pays $1,243 + $909/2 = $1,697.50 ¤ Split costs proportionally » Houston pays 1,332/($666 3,818)*2,818 = $983 » SF pays 2,486/(3,818)*2,818 = $1,835 $592 $317
- 20. 21 AIRFARES ¤ Split Total » Houston pays $1,409 » SF pays $1,409 » Problem is that this is more than Houston roundtrip ¤ Split Houston leg » Houston pays $666 + $909/2 = $1,120.50 » SF pays $1,243 + $909/2 = $1,697.50 ¤ Split costs proportionally » Houston pays 1,332/(3,818)*2,818 = $983 » SF pays 2,486/(3,818)*2,818 = $1,835
- 21. 22 AIRFARES ¤ Split Total » Houston pays $1,409 » SF pays $1,409 » Problem is that this is more than Houston roundtrip ¤ Split Houston leg » Houston pays $666 + $909/2 = $1,120.50 » SF pays $1,243 + $909/2 = $1,697.50 ¤ Split costs proportionally » Houston pays 1,332/(3,818)*2,818 = $983 » SF pays 2,486/(3,818)*2,818 = $1,835
- 22. 23 Two Extreme Positions SF says to Houston: You pay $1,332. That’s what you would have paid anyway.
- 23. 24 What’s the best argument for Houston?
- 24. 25 Two Extreme Positions SF says to Houston: You pay $1,332. That’s what you would have paid anyway. $1,243 Houston says to SF: You pay $2,486. That’s what you would have paid anyway. $742 $99
- 25. 26 AIRFARES ¤ NY --> Houston --> SF --> NY $2,818 ¤ Total with two trips is $1,000 more ¤ NY --> Houston roundtrip $1,332 ¤ NY --> SF roundtrip $2,486 Total $3,818 The $1,000 savings requires both firms equally. If either doesn’t cooperate, then 1k is lost. Hence split savings.
- 26. 27 AIRFARES ¤ Split Houston leg » Houston pays $666 + $909/2 = $1,120.50 » SF pays $1,243 + $909/2 = $1,697.50 ¤ Split costs proportionally » Houston pays 1,332/(3,818)*2,818 = $983 » SF pays 2,486/(3,818)*2,818 = $1,835 ¤ Split $1,000 cost savings » Houston pays $1,332 - $500 = $832 » SF pays $2,486 - $500 = $1,986
- 27. 28 $666 $1,243 $743 $166
- 28. 29 Quick Test
- 29. Runway Problem — Littlechild and Owen (1973) Runway Problem –Littlechild and Owen (1973) 36
- 30. Airline A needs runway of length 1 Airline B needs runway of length 2 1 Runway Problem A B 1
- 31. A & B split cost of first leg B pays cost of second leg 1 Runway Problem A B 1 A pays 0.5 B pays 1.5
- 32. Uber Pool Uber Pool 37
- 33. Alice and Bob share an Uber from LAX Alice gets dropped off first. How should they split the $12 fare? A 6 B 6 LAX Alice pays 3 Bob pays 3 + 6?
- 34. A 6 B 6 Now what? LAX Alice pays 3 Bob pays 3 + 6?
- 35. Do we split the fare in proportion to the one-way fares? A pays 6/17 * $12 B pays 11/17 * $12 A 6 B 6 LAX 11
- 36. What’s the Pie? 11 + 6 – 12 = $5 A 6 B Alice pays Bob pays 6 LAX 11
- 37. What’s the Pie? 11 + 6 – 12 = $5 Alice pays 6 – 2.50 = $3.50 Bob pays 11 – 2.50 = $8.50 A 6 B 6 LAX 11
- 38. A 6 B 11 Diversion version Alice and Bob split first leg (Alice & Bob pay 3) Bob pays 6 by self Diversion cost is 1 (12 versus 11 for Bob) Who should pay cost of diversion? 6 LAX
- 39. A 6 B 11 Diversion version Alice and Bob split first leg (Alice & Bob pay 3) Bob pays 6 by self Diversion cost is 1 (12 versus 11 for Bob) Alice since Alice is out of the way 6 LAX A’ If only Alice lived here
- 40. A 6 B Diversion version Alice and Bob split first leg (Alice & Bob pay 3) Bob pays 6 by self Diversion cost is 1 (12 versus 11 for Bob) Bob since Bob is out of the way 6 LAX B’ If only Bob lived here
- 41. Split diversion cost: they are equally out of the way Alice pays half diversion cost: 3 + 0.5 = $3.50 A 6 B 11 Bob pays 2.5 + 6 = $8.50 6 LAX
- 42. What if Alice gets in first, then picks up Bob, then gets out along the way? 6 A B 6 A exits 11 9 B exits 6
- 43. No agreement: Alice pays 11 & Bob pays 9 Agreement: Total cost is 6 + 6 + 6 = 18 Pie = 20 – 18 = 2 Alice pays 11 – 1 = 10 Bob pays 9 – 1 = 8 6 A B 6 A exits 11 9 B exits 6
- 44. Diversion Version Alice pays full 6 – since he is alone Alice pays 3 (splitting second leg with Bob) Bob diversion effect is (12 – 11) => Bob pays Alice 0.5 Alice diversion effect is (12 – 9) => Alice pays Bob 1.5 Alice pays 6 + 3 – 0.5 + 1.5 = 10 6 A B 6 A exits 11 9 B exits 6
- 45. 47
- 46. What is the Pie ¤ Agreement A + B get 300 – 50 = $250 ¤ No Agreement A gets 100 – 50 = $50 B gets 200 – 50 = $150 No Agreement Total $200 ¤ Hence the pie is $50
- 47. What is the Pie ¤ Agreement A + B get 300 – 50 = $250 ¤ No Agreement A gets 100 – 50 = $50 B gets 200 – 50 = $150 Thus A gets $50 + $25 = $75 B gets $150 + $25 = $175
- 48. 50 Merger Case
- 49. 51 Joint Purchasing ¤ Gazette proposes splitting gains proportionately: 2 for Gazette to 1 for Post ¤ Post says split them the other way (Post gets 2/3rds!). It is Post extra volume that saves Gazette money. Hence Post should get all of that gain. Gazette can keep savings created by its ability to lower Post costs. ¤ Above is rhetorical argument. Point is that both gains should be split evenly.
- 50. 52 Symmetry Every argument can be turned around
- 51. 53 Cost Savings ¤ Gazette has better know how => gets to keep full $1m savings
- 52. 54 Cost Savings ¤ Gazette has better know how => gets to keep full $1m savings ¤ Post brings to the table worse costs. If costs were lower, less savings to be had.
- 53. 55 Macro Perspective ¤ Current values are 10m and 22m. ¤ New joint value is 41.85m ¤ Create 9.85m ¤ Split gain evenly ¤ Gazette pays 10 + 4.925 = 14.925m ¤ If Post walks away, 9.85m is lost
- 54. 56 TCC and HT ¤ Coke purchasing power helped Honest reduce the cost of plastic bottle from 19¢ to 11¢. ¤ On 100 million bottles that’s worth ¤ Who should get this gain?
- 55. 57 TCC and HT ¤ Pay market multiple on sales up to $XXm ¤ Pay 0.5 * market multiple on sales thereafter
- 56. 58 Rio Tinto & BHP ¤ $30 billion of synergies ¤ Market caps: $160b and $250b.
- 57. 59 Power in Negotiations ¤ Doesn’t exist! ¤ Once you define the Pie, the two are symmetric.
- 58. 60 What Might it Mean? ¤ Token example ¤ 101 tokens. Each is worth ¤ $1 to Alice, 1¢ to Bob ¤ Does that mean Alice gets 1 and Bob gets 100 – so that they both end up with $1
- 59. 61 What Might it Mean? ¤ Token example ¤ 101 tokens. Each is worth $1 to Alice, 1¢ to Bob ¤ No. Alice is then giving up $100 while Bob is giving up 1¢. Why look at equality in payoff versus sacrifice?
- 60. 69 Physician Group Purchase ¤ One buyer (Hospital) ¤ Two physician groups ¤ V(0) = 0 no deal ¤ V(1) = 100 buy one group ¤ V(2) = 120 buy both ¤ If doctors merge, then 120 or 0 ¤ H gets 60; doctors get 60 (30 to each)
- 61. Zincit ¤ New drug for Acid Reflux. ¤ Zums has offered $20m. They plan to use drug as dietary supplement so no FDA approval required. This is their best offer. ¤ Zincit will apply for FDA approval. If approved, will earn profits of $120m. If not, then will make $20m. ¤ Seller thinks chance of approval is 60%. ¤ Buyer thinks it is 10%.
- 62. What is the Pie? First cut: Increasing profit from 20m to 120m in event of approval So it is $100m. Split it: 50m to each Simple deal: Pay $20m upfront + 50% of profits above $20m Probabilities are irrelevant
- 63. More Pie? To maximize the pie, seller should get $100m bonus if FDA approval. Worth $60m to seller and costs buyer $10m. Best case for Seller / worst for Buyer: $15m upfront + $100m bonus Worst case for Seller / best for Buyer: –$10m signing + $100m bonus Midpoint: $2.5 upfront + $100m FDA bonus
- 64. 73 What is the Pie? Two levels Level 1: Buy company and create chance of getting extra $100m That suggests $20m upfront + $50m bonus Level 2: Trade upfront for more bonus