Salmones Puyuhuapi Part Iii

2 Pages Posted: 2 Jun 2017

See all articles by Samuel E. Bodily

Samuel E. Bodily

University of Virginia - Darden School of Business

Abstract

This case series is appropriate for undergraduate, MBA, executive education, and MBA Exec audiences but is specifically designed for decision analysis, a first-year MBA core course. The Part III case considers the strategic competitive interactions between the farming company and the harvesting company. A payoff matrix provides insight into choices the two parties will make in negotiating the terms of the option, in particular the price bid by the farmer and the price accepted by the harvester. The possible equilibria of the matrix analysis and the identification of Pareto Optimal outcomes lead to insight about the outcome of the bidding negotiation.

Excerpt

UVA-QA-0778

Sept. 15, 2011

Salmones Puyuhuapi PART III

Discussions between Ace Services (Ace) and Salmones Puyuhuapi (SP) regarding an on-call harvest option were now at the final stage and had become somewhat delicate. Ace had kept private all information about their harvesting costs. They also had given away no information about the extra cost incurred to be available to harvest during the next two months.

One thing was sureā€”Ace would do the harvest; they were the only harvest contractor in the area. The only question was whether they would do it now, in two months, or, if an on-call option was struck (see Part II case), at the onset of the virus, if it hits, sometime in the following two months. Since Ace was paid by weight, it would enjoy more revenue and contribution margin for their harvest if it were done later, when the fish were larger. And Ace would be happy to have the up-front premium (not yet set) and the exercise premium (either $ 50,000 for one squad or $ 200,000 for two squads) from the option. Ace had already revealed that they could harvest now or in two months, so in principle they had the capacity to harvest, providing the harvest did not preclude commitments to other salmon farmers. At one extreme, after another look at their schedule, Ace might be able to shift other customers to meet the needs of SP, particularly if only one squad was needed by SP. At the other extreme, Ace could incur costs of flying in experienced workers and leasing extra equipment if their schedule could not be finessed.

. . .

Keywords: decision analysis, decision diagrams, subjective probability, value of control, downstream decisions, real option, payoff matrix, competitive analysis

Suggested Citation

Bodily, Samuel E., Salmones Puyuhuapi Part Iii. Darden Case No. UVA-QA-0778. Available at SSRN: https://ssrn.com/abstract=2975145

Samuel E. Bodily (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4813 (Phone)
434-293-7677 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/bodily.htm

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