Question

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? (Show your work!)

Answer 1

JVs	Total Earnings ( $ M)	A	B	C	F
A,B,C,F	100	25	25	25	25
A,B,C	100	33.33	33.33	33.33	0.00
A,B,F	80	26.67	26.67	0.00	26.67
A,C,F	70	23.33	0.00	23.33	23.33
B,C,F	100	0.00	33.33	33.33	33.33
A,B	80	40.00	40.00	0.00	0.00
A,C	70	35.00	0.00	35.00	0.00
A,F	30	15.00	0.00	0.00	15.00
B,C	40	0.00	20.00	20.00	0.00
B,F	80	0.00	40.00	0.00	40.00
C,F	70	0.00	0.00	35.00	35.00
Individually	15	15	15	15	15
	Highest earnings	40	40	35	40

Two joint ventures will form based on the above table i.e A, B will form joint venture and C, F will form a joint venture.

Since A, B JV will earn the highest return in all the other combinations.

Since A, B eliminated from the table then the next highest in C, F will be the forming JV since the individual return is less the C, F JV.