A.5 Manipulating Alternatives to No Agreement Question 2: Consider negotiations
ID: 3210276 • Letter: A
Question
A.5 Manipulating Alternatives to No Agreement Question 2: Consider negotiations over the rental price for air compressors between Best Buy in Thousand Oaks and Radkat Compressed Air Co. of Simi Valley. Best Buy seeks a compressor for the 5 days of Spring Break Week (Monday, Tuesday, Wednesday, Thursday, Friday). The only company currently known to have the right kind of compressor (Radkat) is willing to rent their only compressor for as little as $600 per day. Best Buy and Radkat hire quantitative analysts who determine that Best Buy using the compressor adds $1,300 to profits each day (that is, the dual price is $1,300). On Sunday night at 6pm, Best Buy confronts Radkat over the rental price. Best Buy presents their offer of their price to rent. Radkat either accepts it or rejects it and returns the next day with a counteroffer. Offers alternate thereafter. The air compressor is only rented in those days after an agreement is reached a) What initial rental rate should Best Buy offer to Radkat? Should Radkat accept that initial offer? b) Now suppose that, on Sunday night at 5pm, Best Buy is given a take- t-or-leave-it offer to be supplied a compressor by Compressed Air Supply Co. for $800 per day. Re-compute Best Buy's rental rate offer to Radkat c) Finally suppose, in addition to the alternative rental offer to Best Buy from Compressed Air Supply Co. described above, the problem changes because on Sunday night at 5pm Radkat finds an alternative rental customer who makes a take-it-or-leave-it offer to rent their only compressor for $700 per day for each of the 5 days of the Spring Break Week (Monday, Tuesday, Wednesday, Thursday, Friday). Re- compute Best Buy's rental rate offer to Radkat Answer to Question:Explanation / Answer
a) Initially:
Incremental profit per day= 1300 dollars
Incremental cost (rent) per day = 600 dollars
Incremental revenue per day = 1300-600 = 700 dollars.
As there is an increase in revenue for 700 dollars, the Best buy can quote upto 1300 dollars at most. Radkal can accept the offer as it was ready for 600 dollars first.
b) Incremental cost =800 per day
Hence atmost 800 dollars only Best back can be ready to pay to Radkal as rent per day.
c) When competitor is ready to pay 700 dollars, per day, Best back should offer atleast 700
In case of b, the quote should be between 700 and 800.
In case of a, quote should be between 700 and 1300.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.