Question

Frankie Ferrara Part A Frankie Ferrara is a veteran rock musician. In the late 1970’s, Frankie’s albums were regular mainstays on the Billboard charts. Ferrara has made something of a comeback in the last few years, and today his fans include both teenagers and Baby Boomers. Frankie is finalizing plans for a three month Northeast tour. His schedule is complete except for a show in Boston. Frankie is currently negotiating with Night Howl, a popular club in downtown Boston. Due to tight schedules on both sides, the only possible date is Friday, November 15, 1996. Frankie has already explored the possibility of performing that same night at Geeper Creepers, a club just down the block from Night Howl. Geeper Creepers is prepared to offer Frankie its standard payment of $5,000 plus $5 for each ticket sold. Frankie’s best guess is that Geeper Creepers will be able to sell 1,000 tickets, bringing his total payment to $10,000. Performance fees aside, Frankie is indifferent between playing at Night Howl and Geeper Creepers. Since Geeper Creepers needs a “yes” or a “no” at the end of the week, Frankie has arranged a meeting with Jane Johnson, booking agent for Night Howl. Johnson has two other alternatives for the night of November 15: Susie Gee, a nationally-renowned folk singer, and The Split Infinitives, a rising alternative band which has just signed a major label recording contract. The Split Infinitives have played a dozen shows at the Night Howl and have sold out each of their last five events. Although they are clearly Johnson’s first choice, The Split Infinitives have an even tighter schedule than Frankie: they will be touring in England in early fall, before beginning a tour on the West Coast. Since their schedule will not be finalized for another two weeks, Johnson will not know of The Split Infinitives’ availability before she needs to decide whether to book Frankie Ferrara. Jane Johnson will however know of The Split Infinitives’ schedule before she must commit to Susie Gee. All told, Johnson believes that there is only a 25% chance that The Split Infinitives will be available for the night of November 15. The economics for each of the artists are described in Table 1. Johnson is almost certain that either Susie Gee or The Split Infinitives would sell out Night Howl’s 1,500 seat venue, as both have in the past. But Johnson will only be able to charge $12 for Susie Gee in contrast to the $22 she can get if she books The Split Infinitives. With Frankie, Johnson would sell tickets for $20. Given his loyal (but limited) following in her mind, she is confident that she will be able to sell 800 tickets for his show. Frankie Ferrara. Johnson has negotiated payments of $11,000 with Susie Gee and $18,000 with The Split Infinitives. The economics of booking either artist are quite favorable for Night Howl. Still, Jane Johnson might very well choose to go with Frankie Ferrara if she can negotiate a good deal with the aging rock star. Questions Assume that all parties are risk neutral expected-value maximizers.

Susie Gee The Split Infinitives Frankie Ferrara Ticket Price $12.00 $22.00 $20.00 1,500 1,500 800 None Little None Expected Attendance Level of uncertainty about Attendance Production and other expenses Expected Profit (excluding payments to performers) $3,000 $15,000 $4,000 $29,000 $4,000 $12,000

1) What is Frankie’s BATNA? What is Frankie’s reservation price?

2)What is Night Howl’s BATNA? What is Night Howl’s reservation price?

3) Is there a ZOPA? If so, what is it?

4) For this question only, assume that Frankie has an agent who is just starting out in the business. The agent gets 20% of whatever fee he negotiates for Frankie. In addition to his fee, the agent would be able to generate “considerably more” future business for himself if he books Frankie at Night Howl than if he books Frankie at Geeper Creepers. Qualitatively, how does the ZOPA change if Night Howl and Geeper Creepers negotiate only with the agent rather than with Frankie directly? Assume that the agent is interested only in maximizing his own expected value. (10 points)

5) Consider for this question only the following factors. Indicate whether each factor (a) would increase (I), decrease (D), or have no impact (NI) on Frankie’s reservation price; and (b) would increase (I), decrease (D), or have no impact (NI) on Jane Johnson’s reservation price: a) Jane Johnson is risk averse; (5 points) b) Frankie Ferrara is risk averse; (5 points) c) For sentimental reasons, Frankie prefers playing at Geeper Creepers to Night Howl, all else equal. (5 points)