A firm and its supplier are going to negotiate a deal every quarter. Since the supplier's cost
Question:
A firm and its supplier are going to negotiate a deal every quarter. Since the supplier's cost is $10 million per quarter and the value to the firm is $14 million per quarter, there is $4 million per quarter to split between the two parties. However, they can hire a negotiation consultant for a quarter for $500,000. If neither hires the consultant, each expects to get half of the $4 million. If one hires a consultant (and the other does not), the party hiring the consultant expects to get three-fourths of the put minus the consultant costs. If they both hire consultants, they cancel each other out and they expect to get half the pot minus their individual consultant costs. They expect to repeat this process every quarter for the foreseeable future. Can they agree to ban consultants?
Fundamentals of corporate finance
ISBN: 978-0470876442
2nd Edition
Authors: Robert Parrino, David S. Kidwell, Thomas W. Bates