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

Queestion 4 (a)

Total profit that can happen when labor strike = $ 800 million + $ 700 million = $ 1500 million

Costs of strike = $ 600 + $ 300 = $ 900 million

Lets say success of strike probability = p

so for breakeven;

1500 * p - 900 * (1-p) = 0

1500 p - 900 + 900p = 0

2400 p = 900

p = 0.375

as here the success of strike is 0.5, the union should strike.

(b) Management's lockout perspective:

Total gains of a lockout = $ 900 + $ 400 = $ 1300

Total costs = $ 500 + Fain reprucssion costs

So as the success probability of strike = 0.50

so when the total costs will exceed the total gains then the owners would accept to willing to force a lockout.

1300 >= 500 + fain reprucssion cost

So,

Fan reprcussion costs =< $ 800 million

So maximum fan reprucssion costs can be $ 800 million

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