Game Theory, Hostess vs BCTWGMIU

Of late, it is hard to turn on the TV, Facebook, or participate in just about any other aspect of social communication without hearing about the bankruptcy of Hostess. While it seemed to be a sudden development (at least as far as the media is concerned) it was something that has been going on for years. In fact the recent developments were all being pursued by a new management team that was looking out for the well-being of the company, rather than their own good. 
As part of the deals between the unions and Hostess, the new CEO was offering quite a change. Several items included in the package, as offered by Hostess, included: 1) 25% ownership in Hostess, 2) a package of bonds to go to the employees valued at $100,000,000, 3) two seats on the board of directors. In exchange for these, the union had to agree to several terms, which included 1) cut pay to comparable levels found at other major bakeries, 2) offer new-hires 401(k) instead of pension plans, 3) cover some of their own expenses, i.e. insurance. Hostess made a generous offer, and in return, they get to continue business operations. The Teamsters union looked the deal over and thought it wise, agreeing to it as the best possible choice for its' members.
The Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (BCTWGMIU) were advised to carefully consider the deal as offered by Hostess. To which they decided they would strike to prove a point, and remedy past wrongs inflicted by a management team that is no longer at Hostess and one that has been gone for almost a year. As we know from watching the news recently, the decision made by the BCTWGMIU was to take the $0,$0 option, rather than the option that would have meant continuing operations for Hostess and quite a deal for union employees. 
The upside to this story is that the consumer will come out the winner, no matter what happens to Hostess, BCTWGMIU, or anyone else involved with Hostess, because someone will get to purchase the Hostess brand and products to continue to manufacture and sell, since there is still a high demand for these products. And the game continues...


Dr. Tufte said...

Da Boy: 100/100.

I approve of your use of game theory, but I'm not sure I'd approach it this way.

There tends to be a lot of Monday-morning-quarterbacking of this situation going on. As an economist trying to figure this out, the first thing to assume is that the two parties aren't dumb: they've made strategy choices that are optimal, even if the outcome doesn't look optimal.

How can this be so? Here are 3 possibilities.

1) The situation is a prisoners' dilemma. In this case, when the players make their best choices they get the worst outcome.

2) We've got the payoffs down wrong in our game. In this case, the media may have portrayed the details to us incorrectly.

3) The game is repeated, and not a one shot. In this case, there is a role for signalling and punishment of the other player.

I'm not inclined to think the answer is # 1. If it were, we'd expect to see some negotiation to move to a better outcome. That doesn't seem to be happening.

It's possible that it's # 2. However, the data doesn't seem to be hard to figure out, so what is being obscured? I can't think of much.

So I wonder if what we're seeing is # 3. That refusal to accept the offer makes sense because the game isn't over. Perhaps the union is hoping for a better offer from a new set of negotiators on the other side. Given the Obama administrations favorable disposition towards unions, perhaps they are thinking there is a chance of a bailout. To me, this seems especially likely since Hostess is such a well-known brand.

Miz Ava said...

I agree with Dr. Tufte that the likely option is 3) considering that Hostess filed for bankruptcy in 2004 which lasted until 2009. I agree that it is unlikely to be option 2) because bankruptcy filings are public record and if we really wanted to know the pay-offs we could all find out.

I don't completely agree that the consumers are winners necessarily since the price of Hostess products will likely increase in order to cover the costs of the agreement. The customers are winners in a sense because the products still exist but the prices will surely increase.

Dave Tufte said...

Miz Ava: 50/50.

Good point.

In face-to-face classes, I emphasize much more than texts do how consumer and producer surplus are what it's all about. In this case, the union is clearly trying to convert more consumer surplus into a producer surplus that they can access.