Suppose that Arnold Schwarzenegger (GAS) pays Besanko, Dranove, and Shanley (BDS) an advance of $5 million to write the script to Incomplete Contract, a movie version of their immensely popular text on business strategy. The movie contract includes certain script requirements, including the stipulation that GAS gets to play a strong, silent business strategist with superhuman analytic powers. BDS spend $100,000 worth of their time to write a script that is tailor-made for the ex-Terminator (GAS that is). After reviewing the script, GAS claims that it fails to live up to the contractual requirement that he have several passionate love scenes, and he attempts to renegotiate. Given the ambiguity over what constitutes passion, BDS are forced to agree.
a. What was BDS’s rent?
b. What was their quasi-rent? What assumptions did you make to compute the latter?
c. Could BDS have held up GAS? Explain.
Suppose that Arnold Schwarzenegger GAS pays Besanko Dranove and Shanley