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Game theory in the popular press.

Even a Losing Bid can Pay Off

Wall Street Journal
Adam Brandenburger & Barry Nalebuff
November 18, 1996
text is a cache of http://mayet.som.yale.edu/coopetition/news/wsjoped.html

The phone rings. A prospective customer—a large account that's been with one of your competitors for some time—asks you to give him a bid. Here's your chance.

You know it's a long shot, and that prompts you to work just a little harder and be just a little more aggressive on price. Still, in the back of your mind is the sneaking suspicion that the customer is just using you to get a better price from his current supplier. But that's the way the game is played. If you don't bid, there's no chance of getting the business. You also risk alienating the customer and losing any chance of future business. So you make an aggressive bid. The customer thanks you and promises to get back to you—but he doesn't.

What might you have done differently? You could have bid lower, but there's no guarantee that would have worked any better. The problem with the strategy was more basic. The right question to ask is: How important is it to the customer that you bid? If your bidding is important—even if the customer is just trying to gain leverage against his current supplier—then you should get compensated for playing the game.

Of course, most customers would simply laugh at you--or swear at you--if you tried to get them to pay you in cash for making a bid. You've been working for years just to get this prospective customer to return your calls, and now you're asking him to pay you to bid? Fortunately, there are other ways of getting paid to play—ways that can also increase your chance of getting the business.

Consider this story: NutraSweet is Monsanto's brand name for aspartame, the high-intensity sweetener that fueled the growth of diet soft drinks in the 1980s. In anticipation of the expiration of Monsanto's patent on aspartame, the Holland Sweetener Company built a $50 million plant to enter the market. But when Holland entered the game, it didn't do well at first in attracting the major soft-drink makers. Instead, they used Holland as a bargaining chip to get a sweeter deal from Monsanto. Soon Coke and Pepsi together were paying $200 million less a year for NutraSweet.

But Holland's executives ultimately turned their company's difficulties into a bargaining chip. The soft-drink makers couldn't count on Holland staying in the market. Were it to exit, they would find themselves again totally reliant on NutraSweet. Thus, Holland was in a position to get paid to stay. In return for a guaranteed sales contract from one of the big soft-drink makers, Holland agreed not only to stay but to expand capacity.

Asking for a guaranteed contract is just one way of getting paid to play. In return for bidding, you can ask for better access to information about the customer's business. That gives you a much better chance of winning the account. You can ask to deal with a different person. Make the bidding an opportunity to meet senior management. Ask to meet someone who will appreciate what you bring to the table and not just focus on getting the lowest price.

Or you might try turning the tables. Instead of quoting the customer a price, ask the customer to quote you a price at which he would give you his business. The customer gives you a signed contract complete with price, and you decide whether to sign. Car dealers know this technique all too well.

BellSouth's unsuccessful bid to buy Lin Broadcasting is a dramatic example of getting paid to play. Donald Pels, Lin's CEO, wanted BellSouth to enter the bidding for his company. Craig McCaw had made a hostile offer, and Mr. Pels needed some alternatives. The problem was that BellSouth suspected that McCaw would win any bidding contest. So in return for bidding, BellSouth demanded $54 million plus expenses from Lin. BellSouth got what it asked for. As a result of BellSouth's bidding, Lin's stock market value rose by $1 billion. Craig McCaw won in the end, but BellSouth made $54 million with a losing hand. And for Mr. Pels, paying $54 million for $1 billion was a bargain.

Sometimes the most valuable service you can offer is creating competition, so don't just give it away. Everyone would like to be BellSouth and get paid millions for playing a losing hand. That's pretty rare. But if the customer will benefit from having you bid, use that power up front to ensure that you'll get something for playing the game.

We've talked about the game from the perspective of the potential bidder. If you're on the other side and you don't have enough companies competing for your business, try bringing more players into the game. Even if it means paying them to play, the benefits of the increased competition can easily pay for the costs.

The phone's ringing again. Now you're ready to answer it.