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  \noindent
 {\bf  Case for Discussion: ``US Air For Sale''}\footnote{This case
was
developed by John Maxwell for G570 at Indiana University, following a
suggestion of Patrick Meister and Kyle Anderson,  and has been
rewritten in the present form by Eric Rasmusen. Date:  January 10,
2002. I have teaching notes separately (contact me at
erasmuse@indiana.edu).  }
 
  \noindent
 {\bf  Background:}  On October 2, 1995, USAir, at the time  the
nation's fifth
largest airline, announced that it had approached United Airlines and
American Airlines about a possible buyout.  United and American are
the two largest U.S. airlines, and both are interested in growth in
the highly competitive airline market. United and American must  now
consider    what to do.
  

 \noindent
 {\bf   Financial Projections:}  Financial analysts for both United
and American have made projections for all  the possible scenarios, on
the request of the strategic  bidding consultants.   They say that
United and American start in equally strong positions, but that can
change depending on who wins the auction.

  The three possible outcomes for an airline are: 


 \noindent
 {\it Neither firm bids enough for US Air to accept.} Both United and
American will maintain their strong positions, and they can expect
future profits of \$50 billion each.

 \noindent
 {\it Our airline wins.}  The winning airline will become the dominant
firm in the market, and  can expect future profits of \$80 billion.
The purchase cost of US Air, however, must be subtracted from this in
order to calculate net profit.  Therefore, the payoff for the firm
with the winning bid can be written as
 $$
 Payoff_{Winner}= 80 - B_{winning}. 
 $$
  It is estimated that the minimum price US Air will accept is \$10
billion.

 \noindent
 {\it Our airline loses.} The losing firm may have trouble competing
with the larger network of the winner because of the greater variety
of flights a large airline can offer. The more, however, that the
winner pays for US Air, the better off is the loser, because the cash
flow  the winner uses  to pay for the acquisition is no longer
available for other investments in new equipment and  lenders will be
more reluctant to lend to the   newly enlarged firm.    The analysts
suggest that a good approximation to the payoff of the losing firm
will be
  $$
 Payoff_{Loser}= 30 + .25*B_{winning}. 
 $$
   In particular, if the winner pays just \$10 billion for US Air, the
loser's profit will be  \$32.5 billion.

   \noindent
 {\bf  Auction Rules:}     It is unclear  which of two methods of
offering themselves for sale US Air will follow.    It is thought that
an English auction and a sealed-bid auction are the leading
candidates.

\newpage

 \begin{large}
 
  \noindent
 {\bf  Case for Discussion: US Air For Sale    }

  \noindent
{\bf   Your Position:}  You have just been appointed to the board of
directors for  either  United Airlines or American Airlines.  It is
your duty to decide whether you want to place a bid for US Air, and
what amount you will bid if you do.  Note that if a majority of  the
board of directors cannot agree on a bid, no bid at all will be made.
 

   \noindent
{\bf  English Auction Rules:}    US Air will solicit initial bids in
writing from anyone who cares to bid.  Once both bids are received,
they will be announced publicly.  If there are no bids of at least 10
billion dollars, US Air will
continue as an independent firm.   If there is at least  one bid of 10
billion dollars or above,  US Air  will allow a counteroffer, and
 an English auction commences.  The winner has purchased US Air.

  
   \noindent
{\bf  Sealed Bid  Auction Rules:}    US Air will solicit  bids in
writing from anyone who cares to bid.  Once both bids are received,
they will be announced publicly.   If there is just one bid, it wins
if it is \$10 billion or above. If there are no bids, US Air will
continue as an independent firm.   If there are two bids, and  at
least one is  \$10 billion or above,  the
winner has purchased US Air, ties being broken   by the flip of a
coin.
 
 \end{large}


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