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Suppose Radica has two actions: to compete with Mattel or to sell the …rm altogether. Suppose Mattel has two actions: to enter the electronic game segment or to stay out. In each square the …rst payment is for Mattel and the second payment if for Radica. Let us check what happens if Mattel decides to stay out. Radica needs to decide whether to compete (that is in our case to remain in the electronic segment) or to sell the …rm to some other company in the market. Radica will sell the …rm if cW M < s; where W M stands for “without Mattel”. However, as we argued before, it is unlikely that any other …rm in the electronic segment of the toy industry will buy Radica for an amount higher than its pro…ts from this fast-growing segment of the market, especially without the biggest player around (so the pro…ts will tend to be much higher for Radica). From this discussion it is not hard to assume that cW M > s, that is, without Mattel, Radica will enjoy pro…ts equals to cW M which are higher than the maximum price any other …rm in the segment will o¤er for Radica. Now let us see what happens when Mattel enters to compete. We assume that cM s; where M in this case stands for "with Mattel". In the best-case scenarios, the pro…ts Radica was enjoying before Mattel enters will go down to a Cournot-type equilibrium which are less than the pro…ts Radica was enjoying before without Mattel. This is true by assumption in the Gans and Stern model, and as we discussed above, it is also a reasonable assumption for the Mattel-Radica case. Then, if Mattel enters the equilibrium is (e; s) and if Mattel stays out the equilibrium is (o; cW M). The Nash equilibrium we …nally obtained in this real-world game between Mattel and Radica was (e; s), that is, Mattel entered the market and Radica was bought out. For our simple framework to check it must be the case that e > o, which, as we argued before, is a reasonable assumption after noting that the electronic segment is growing three times as fast as the traditional games segment in the toy industry (see Table 1). 18
5 Conclusions Gans and Stern (2000) developed a model where an incumbent …rm is confronted with the threat of a potential entrant who, through product innovation, is seeking to enter the market. We used this framework to better understand the Mattel-Radica acquisition, adding to the already extensive M&A literature a new dimension: how R&D (knowledge) can be used as an important strategic tool for technology-driven M&As. This is important because as we show in the analysis of this speci…c case, the Schumpeterian assumption where an innovator will enter the market and successfully contest the incumbent, is not what we observed in M&As involving …rms generating technological innovations. Although all of the underpinnings of the “real game” Mattel and Radica played in October 2006 will never be known to an outsider, the analysis we developed in this paper could shed some light of what the main issues were in the negotiation process. But most importantly, this analysis provides a general framework to better understand M&As in the “market of ideas”. References [1] Aghion, P. and J. Tirole (1994), The management of innovation, Quarterly Journal of Eco- nomics 109, 1185-1210. [2] Babitch, S., E. Gili, A. Kim, P. Nyberg, and A. Wang (2006), The future of play: Mattel’s strategic plan. Working Paper Series: Illinois Institute of Technology. [3] Bittlingmayer, G. and T. Hazlett (2000), DOS Kapital: Has antitrust action against Microsoft created value in the computer industry? Journal of Financial Economics 55, 329-359. [4] FTSC (2006), Global Market Magazine, November/December. 19
Page 3 and 4: Game-Theoretic Analysis of the Matt
Page 5 and 6: The tension of this game is the fol
Page 7 and 8: license fee to allow E to use the i
Page 9 and 10: M to acquire E: If agreement is rea
Page 11 and 12: importance of electronics toys. For
Page 13 and 14: from the beginning, evolved in the
Page 15 and 16: not be much chance for Radica to co
Page 17 and 18: in developing new innovations in th
Page 19: also increased it with respect to R
Page 23 and 24: Table 1 Structure of the toy indust
Page 25 and 26: Table 3 Mattel Financial Performanc
Page 27 and 28: Table 5 Mattel and Radica intensity

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