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# Suppose that Honda is on the verge of signing a 15-year cont

Suppose that Honda is on the verge of signing a 15-year contract with TRW to supply airbags. The terms of the contract include providing Honda with 85 percent of the airbags used in new automobiles. Just prior to signing the contract, a manager reads the one of TRW's competitors has introduced a comparable airbag using a new technology that reduces the cost by 30 percent.

How would this information effect Honda's optimal contract length with TRW?

#### Solution Preview

Suppose that Honda is on the verge of signing a 15-year contract with TRW to supply airbags. The terms of the contract include providing Honda with 85 percent of the airbags used in new automobiles. Just prior to signing the contract, a manager reads the one of TRW's competitors has introduced a comparable airbag using a new technology that reduces the cost by 30 percent.

How would this information effect Honda's optimal contract length with TRW?

Solution:

Honda is on the verge of signing a ...

#### Solution Summary

Suppose that Honda is on the verge of signing a 15-year contract with TRW to supply airbags. The terms of the contract include providing Honda with 85 percent of the airbags used in new automobiles. Just prior to signing the contract, a manager reads the one of TRW's competitors has introduced a comparable airbag using a new technology that reduces the cost by 30 percent.

How would this information effect Honda's optimal contract length with TRW?

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