There are 4 firms: A, B, C and F. They want to form a joint venture...

There are 4 firms: A, B, C and F. They want to form a joint venture (JV). The returns of the JV are as follows:

- If all the firms form a JV, the JV earns $100m

- The JV of A, B and C earns $100m

- The JV of A, B and F earns $80m

- The JV of A, C and F earns $70m

- The JV of B, C and F earns $100m

- The JV of A and B earns $80m

- The JV of A and C earns $70m

- The JV of A and F earns $30m

- The JV of B and C earns $40m

- The JV of B and F earns $80m

- The JV of C and F earns $70m

- Anyone not in a JV earns $15m

The profit of a JV must be split (not necessarily evenly) among the participating firms. Assume that firms only care about their own returns, and a firm cannot be part of more than one JV. What do you predict will happen? Who will form JV, and who will get how much of the returns?

Expert Solution

So in all there are 11 scenarios to form a JV. We start eliminating the scenarios where other scenarios are more beneficial then the eliminated scenario.

Option 2 is better than Option 1, as taking F does not bring any value addition as compared to option 2. So 1 is eliminated
Option 6 is better than Option 3, as taking F does not bring any value addition comparing option 3 &6. So 3 is eliminated
Option 7 is better than Option 4, as taking F does not bring any value addition comparing option 4 &7. So 4 is eliminated
Now comparing option 6 & 10, B has an option to join hands with either A or F. B will prefer F as A has more demand and will ask a higher return unlike F. So partnership of B& F is finalised. What will be the return expected by F. F will be getting minimum 30 return using option 10. So B will have to give 35 to F using option 6 and he will receive balance 55.
Now since A & C are left, they will form JV using option 7. They will mostly share profits equally as there is no other option left through which they can get higher profit then 35 (70/2) . If they form no JV they will earn 15. Hence both has equal need of each other hence share profits equally.

jeff jeffy answered 2 years ago

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