Getting Employees to Work in the Firm's Best Interests In the late 1990s, a large auction house, Auction Services International (ASI), employed art experts to manage ASI's business in various schools of art- French Impressionism, American Realism, and the like. Each expert's job was to persuade art owners to use ASI's auction services to sell their art. ASI earned money by charging the art owners a percentage of the final price at auction. The art expert negotiated this percentage rate with the art owners. Art experts were given discretion to negotiate rates from 10% to 30%, depending on the art expert's assessment of the seller's willingness to pay and knowledge of competitors' offers. Instead, most of these negotiations yielded relatively low rates, much closer to the 10% minimum. Puzzled, ASI's CEO did some investigation and discovered that the art experts were discounting rates in exchange for gifts from the sellers-cases of fine wine, fur coats, even luxury cars. After she found out about these kickbacks, the CEO took away the experts' discretion to negotiate the rates. The CEO's action ended the exchange of gifts for lower rates, but the experts had become accustomed to the kickbacks, considering them an important part of their compensation. Consequently, many of the art experts quit, leaving to set up their own independent galleries in direct competition with ASI. To make matters worse, the CEO decided to set a 17% price by conspir- ing with a rival auction house. When the conspiracy was discovered, the CEO was sentenced to a year in jail, and the judge tacked on a $7.5 million fine, an amount calculated as 5% of the $150 million volume of commerce affected by the price-fixing conspiracy.
Getting Employees to Work in the Firm's Best Interests In the late 1990s, a large auction house, Auction Services International (ASI), employed art experts to manage ASI's business in various schools of art- French Impressionism, American Realism, and the like. Each expert's job was to persuade art owners to use ASI's auction services to sell their art. ASI earned money by charging the art owners a percentage of the final price at auction. The art expert negotiated this percentage rate with the art owners. Art experts were given discretion to negotiate rates from 10% to 30%, depending on the art expert's assessment of the seller's willingness to pay and knowledge of competitors' offers. Instead, most of these negotiations yielded relatively low rates, much closer to the 10% minimum. Puzzled, ASI's CEO did some investigation and discovered that the art experts were discounting rates in exchange for gifts from the sellers-cases of fine wine, fur coats, even luxury cars. After she found out about these kickbacks, the CEO took away the experts' discretion to negotiate the rates. The CEO's action ended the exchange of gifts for lower rates, but the experts had become accustomed to the kickbacks, considering them an important part of their compensation. Consequently, many of the art experts quit, leaving to set up their own independent galleries in direct competition with ASI. To make matters worse, the CEO decided to set a 17% price by conspir- ing with a rival auction house. When the conspiracy was discovered, the CEO was sentenced to a year in jail, and the judge tacked on a $7.5 million fine, an amount calculated as 5% of the $150 million volume of commerce affected by the price-fixing conspiracy.
Chapter8: Game Theory
Section: Chapter Questions
Problem 8.11P
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Transcribed Image Text:Getting Employees to Work
in the Firm's Best Interests
Int
the late 1990s, a large auction house, Auction Services International (ASI),
employed art experts to manage ASI's business in various schools of art-
French Impressionism, American Realism, and the like. Each expert's job was
to persuade art owners to use ASI's auction services to sell their art. ASI earned
money by charging the art owners a percentage of the final price at auction.
The art expert negotiated this percentage rate with the art owners.
Art experts were given discretion to negotiate rates from 10% to 30%,
depending on the art expert's assessment of the seller's willingness to pay and
knowledge of competitors' offers. Instead, most of these negotiations yielded
relatively low rates, much closer to the 10% minimum. Puzzled, ASI's CEO
did some investigation and discovered that the art experts were discounting
rates in exchange for gifts from the sellers-cases of fine wine, fur coats, even
luxury cars. After she found out about these kickbacks, the CEO took away
the experts' discretion to negotiate the rates.
The CEO's action ended the exchange of gifts for lower rates, but the
experts had become accustomed to the kickbacks, considering them an
important part of their compensation. Consequently, many of the art experts
quit, leaving to set up their own independent galleries in direct competition
with ASI.
To make matters worse, the CEO decided to set a 17% price by conspir-
ing with a rival auction house. When the conspiracy was discovered, the CEO
was sentenced to a year in jail, and the judge tacked on a $7.5 million fine, an
amount calculated as 5% of the $150 million volume of commerce affected by
the price-fixing conspiracy.
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