4. a. A pro sports league currently is facing a labor dispute such that the play

Question

4. a. A pro sports league currently is facing a labor dispute such that the players' union is contemplating a strike. The union has determined that the potential gain to a strike would be $800 million and that it could earn alternate income during a strike of $700 million. However, the immediate cost of striking amounts to $600 million, and the union estimates that they would experience $300 million in fan-repercussion costs. Calculate the union's breakeven probability of a successful strike. If the actual probability of (union) success is 50 percent, should the union strike? Explain. b. The same labor conflict has management (franchise owners) contemplating a lockout. From management's perspective, a successful lockout would generate gains of $900 million but would incur an immediate cost of $500 million. Management has alternative revenue sources amounting to $400 million, but the owners question the level of fan- repercussion costs relevant to their side of the dispute. Assuming the probability of (management) success is 50 percent, what is the maximum amount (in dollars) of fan repercussion that the owners would accept to be willing to force a lockout?

Explanation / Answer

a) Payoff of successful strike = 800+700-600-300 = 600

Payoff of failed strike = 700-600-300 = -200

Breakeven probability (p) of a successful strike, is such that expected payoff is at least 0.

600p + (-200)*(1-p) = 0

p = 200/800 = 0.25

Therefore, breakeven probability of a successful strike = 0.25 or 25%

If the actual probability is 0.5, then the union should strike, because this probability is higher than breakeven probabiility. Therefore, the expected payoff will be positive.

b) Payoff of successful lockout = 900-500+400-c = 800-c ,  where c is the fan reprecussion costs relevant to their side of the dispute

Payoff of failed lockout = -500+400-c = -100-c

Maximum amount of c is such that expected payoff is at least 0

(800-c)*0.5 + (-100-c)*0.5 = 0

c = 350

Therefore, maximum amount of fan repercussion that the owners would accept to be willing to force a lockout = $ 350 million

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