A firm and its supplier are going to negotiate a deal every quarter.
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. 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 pot. If only one hires the consultant, it expects to get three-fourths
of the pot minus the consultant costs. If they both hire consultants, they cancel each other
out and they expect to get half the pot minus the consulting costs. They expect to repeat
this process every quarter for the foreseeable future. Can they agree to ban the
consultants?
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