Auctioning fees and legal damages – an appropriate treatment for the auction houses???

This article in NY Times highlights the case when a federal judge (Kaplan) gave final approval yesterday to a $512 million settlement of the lawsuit against the Sotheby’s and Christie’s auction houses by customers who said they were cheated in a price-fixing conspiracy that lasted several years.

The interesting aspect of this case from a game theory point of view was how In this class action, U.S. District Judge Lewis Kaplan sought bids from leading law firms on fees they would charge the plaintiffs, looking to tap a qualified firm at the lowest cost to the class. After receiving the bids from about 20 firms, Judge Kaplan appointed Boies, Schiller, which wasn’t involved in the case at the start, as lead counsel in May.” Read this article here.

The anatomy-of-the-rise-and-fall-of-a-pricefixing article illustrates all the events from start to finish in a very compehensive manner.

Following is the description of how the law firm was chosed based on bids from various parties, the following text has been taken from page 515, Microeconomics 7th Ed by Pindyck & Rubinfeld:

Judge Kaplan entertained secret bids from 20 Law Firms. Each firms was told to offer a fee arrangement consisting of a base and a percentage. A settlement or trial award at or below the base would be given entirely to the plaintiffs, with the law firm receiving nothing. If the settlement or award was higher than the base, the law firm would receive the stated percentage of the amount over the base. Many attorneys operate under a contingent fee system in which they offer a base of zero and expect to receive one-third of the award.

The winning bid was the law firm of Boies, Schiller & Flexner, which bid a base of $405 million and a percentage of 25% to be earned on any award above $405 million. Some of the losing bidders were outraged that BSF had bid so high to get the business. Indeed, some suggested that the firm might not work hard in the plaintiff’s interest because the minimum might be unachievable. Prior to the bidding, observers expected the case to generate a settlement of $130 million. In the end, it appears that Judge Kaplan, the plaintiff’s class, and BSF were all winners. Months after taking on the case, BSF settled with defendants for $512 million, earning the attorney’s a $26.75 million fee (25% of excess of base) and generating just over $475 million for the class members.

Vamsi Duvvuri

MBA Class of 2009

Goizueta Business School

Shyam Ponappa: Tata’s Corus buy: A game theory analysis

I hope Professor Noonan agrees that this is a very insightful read on the game theory analysis of Tata’s acquisition of Corus. I’ve copied the text below with few comments/remarks (in []) from myself to explain the “game” aspect of the deal:

The game plan

Starting with an expectation of a good potential fit, let us see how Tata and Corus have together won out. Visualise a two-dimensional (X-Y) space with Tata’s objective function along the horizontal axis (X) and Corus’s along a vertical axis (Y). The essential requirement for this analysis is that there is an objective function, i.e. a line that measures increasing overall benefit, which can be defined separately for each party along one of these axes. We may surmise that Tata’s primary concern was to pay no more than reasonable compensation for Corus in order to result in a profitable combination, shown as a percentage cut from a notional asking price on the horizontal axis. Corus’s objective function could be the retention of maximum sustainable benefits with employment participation (assuming that the management and union are in sync). This is shown as a percentage on the vertical axis. Mapping Tata’s and Corus’s responses in terms of the percentage cut in price and percentage benefits retained, we get one set of points for Tata and another set for Corus. A line through the first set represents Tata’s response function or strategy, and a line through the other set represents Corus’s response function. For a given cut in price, Tata favours fewer benefits than Corus expects, and for a given benefit level, Corus wants less of a price cut than Tata.

[vduvvur: And hence when the deal was being made, there would’ve been a negotiation going on between the parties about the mix of price vs. employee benefits. It is similar to the Riverside DEC case we did in SDA where DEC could help Riverside with certain financial incentives to adapt a new technology, and Riverside could choose certain particular forms of help and mix them to ensure they receive max benefits]

The Hamada diagram

The Hamada diagram enables a graphic depiction of game theory, and this analysis is an adaptation.* Tata’s ideal solution, referred to as its “bliss point”, is on its strategy line corresponding to a high price cut. This is where it has its highest economic welfare. Corus’s bliss point [vduvvur: the bliss point could be seen as the BATNA, where each party maximize their payoffs], likewise, is on its strategy line where retained benefits are high. Each party’s economic welfare decreases as it moves away from its bliss point; each party’s indifference curves are therefore concentric around its bliss point. [vduvvur: this indifference curve can be seen as the Pareto frontier, along which lies the maximum value created from the transaction]

# For Tata Steel, as the cost of acquisition reduces moving right along the horizontal axis, Tata can concede more benefits to Corus’s employees.
# For Corus, the management and employees seek a sustainable long-term solution that yields benefits with participation. Despite their premium product line, image, and access to markets for these products, their high-cost structure militates against easy solutions. This realisation impelled Chairman James Leng of Corus to initiate discussions with potential alliance candidates.
# Tata’s and Corus’s responses intersect (coincide) at N, the non-cooperative or Nash equilibrium (Figure 2).

This is the norm for non-zero-sum games when players adopt conflicting, mistrustful strategies, so competitive responses force the solution to a point where neither can benefit by acting unilaterally. Coordinated solutions, however, can make both better-off, i.e. deliver a bigger price cut together with more benefits. This is because efficiency occurs where the respective indifference curves are tangential to each other, whereas they intersect at the point of Nash equilibrium. These tangential points are on the “contract curve” joining the two bliss points. A coordinated solution on this line is efficient, and at the midpoint C, is Pareto optimal (most efficient).

Vitamin Inc. Cartel

Some of the world’s largest pharmaceuticals companies were fined a massive £534m for operating an illegal price-fixing cartel on the supply of vitamins throughout the 1990s.

Mario Monti, the European Union’s competition commissioner, said the cartel could be dubbed Vitamins Inc, and was the most damaging and serious it had ever investigated and had cheated European consumers of billions of pounds since vitamins were used in and affected the price of a whole range of products.

He described how senior executives in 13 companies had cynically collaborated to ensure that consumers paid over the odds for vitamins used on their own and in products such as cereals, biscuits, drinks, pharmaceuticals and cosmetics.

“It is particularly unacceptable that this illegal behavior concerned substances which are vital elements for nutrition and essential for normal growth and maintenance of life,” Mr Monti said.

“The companies’ collusive behavior enabled them to charge higher prices than if the full forces of competition had been at play, damaging consumers and allowing the companies to pocket illicit profits.”

Roche, the Swiss pharmaceuticals company, received particular criticism and was given the biggest fine of all – £288m – while German firm BASF was deemed to be the second worst offender and made to pay a fine of £185m.

When Mr Monti was asked whether the 13 firms were in effect just one big global monopoly which could be dubbed Vitamins Inc, he agreed. Others fined included Aventis (£3m), Solvay (£5.7m) and Merck (£5.7m), together with three Japanese firms which were fined a total of £46m.

The commission described how the companies had operated a highly organised cartel holding regular meetings to collude on prices, exchange sales figures and coordinate price increases.

The cartels were run, Brussels said, “at the most senior levels of the undertakings concerned”.

The commission concluded after its two-year investigation: “The prime mover and main beneficiary of these schemes was Hoffman La Roche, the largest vitamin producer in the world, with some 50% of the overall market.

“The involvement of some of its most senior executives tends to confirm that the arrangements were part of a strategic plan conceived at the highest levels to control the world market in vitamins by illegal means.”

The investigation was helped by one of the offenders – French company Aventis – which agreed to “defect” and furnished the commission with what Mr Monti called “decisive information”. As a reward, Aventis was fined just £3m instead of a figure nearer to £70m.

A similar story enlightens us with another price fixing by European Glass makers. And here.

Original Article Source

Vamsi Krishna Duvvuri

MBA Class of 2009

Goizueta Business School