Question 15-6

15-5 Renegotiating Employment Contracts (Figure 15.1). Consider now that the entrant, Every year, management and labor renegoti fought, has the possibility of withdrawing fro ate a new employment contract by sending their the industry (at a loss of 1 for the entrant and proposals to an arbitrator who chooses the best gain of 8 for the incumbent), or staying (at a lo proposal (effectively giving one side or the other of 5 for each player). What is the equilibrium $1 million). Each side can choose to hire, or not this game? Discuss if the entrant is better off wi hire, an expensive labor lawyer (at a cost of or without the ability to withdraw. $200,000) who is effective at preparing the pro- posal in the best light. If neither hires lawyers or if both hire lawyers, each side can expect to win Group Problem about half the time. If only one side hires a lawyer, G15-1 Strategic Game it can expect to win three-quarters of the time. Describe some interaction your company has wi 1. Diagram this simultaneous-move game. another entity (firms producing complementary 2. What is the Nash equilibrium of the game? substitute products, upstream suppliers, or dow 3. Would the sides want to ban lawyers? stream customers), or between internal division within your firm that can be described as a seque tial or simultaneous game. Diagram the strategie 15-6 Entry Game with Withdrawal players, and compute payoffs as best you can. Con In the text, we considered a sequential-move game pute the Nash equilibria. What can you do in which an entrant was considering entering an change the rules of the game to your advantag industry in etition with an incumbent firm Compute the profit consequences of your advice