BazermanMoore

108 Chapter 6: The Escalation of Commitment
A third firm, Boston Scientific, a key J&J competitor, realized that they would be
put at a strategic disadvantage if J&J were to acquire Guidant. Indeed, in the time between
J&J’s initial offer for Guidant and its revised bid, Boston Scientific’s stock price
fell from $35.88 to $25 per share. On December 5, 2005, Boston Scientific offered
$24.7 billion for Guidant. Meanwhile, Guidant’s problems worsened; on December 27,
the FDA released a warning letter that it had sent to Guidant about problems with its
products (Bajaj, 2005).
Nonetheless, negotiations among the three companies continued into 2006. Guidant
tentatively accepted J&J’s raised bid of $23.2 billion on January 11. The next day,
Boston Scientific upped its bid to $25 billion. The following day, Guidant provisionally
accepted J&J’s newly revised bid of $24.2 billion. On the 17th, Boston Scientific offered
to buy Guidant for $27 billion, more than J&J’s initial bid prior to Guidant’s legal troubles
(Feder & Sorkin, 2005). On January 25, J&J decided to bow out of the race, and
Guidant accepted Boston Scientific’s bid (Harris & Feder, 2006; Saul, 2006).
The next day, Boston Scientific’s share price fell to $23.15—almost $2 lower than it
had been prior to the company’s first bid for Guidant. (Notably, J&J’s share price had
fallen every time it had announced a bid on Guidant.) Months later, in June 2006,
Boston Scientific was forced to recall 23,000 Guidant pacemakers. The company’s
share price had fallen below $17 per share.
Both J&J and Boston Scientific aggressively pursued the takeover of a company
that had obvious technological, legal, financial, and public-image liabilities. These decisions
caused the two companies’ stock prices to fall. This outcome is not surprising. In
takeover contests where the losing bidder faces a loss in market share or competitive
position, the natural outcome can be overpayment for target firms. Bidders become
indifferent between winning the auction by overpaying and losing the auction and suffering
a loss in competitive position.
In both the $20 auction and in corporate bidding wars, bidders typically fail to consider
the perspective of the other party and continue to bid to justify their initial strategy.
The auction ultimately leads to dramatic levels of financial loss when the two
parties forget their original objective of earning money and switch to the objective of
beating the other party. This is when the auctioneer does especially well!
The competitive escalation paradigm has much in common with Staw’s unilateral
escalation paradigm. In both cases, the decision maker makes an initial decision that he
or she feels a need to justify through future decisions, and reaches a point where he or
she has ‘‘invested too much to quit.’’ However, there is one major difference between
the two paradigms. In the dollar auction, competition with the other party—that is, the
desire to ‘‘win’’—serves as added motivation to escalate commitment.
WHY DOES ESCALATION OCCUR?
The previous sections have provided some clues about the conditions under which escalation
of commitment occurs. The first step toward eliminating nonrational escalation
from our decisions is to identify the psychological factors that feed it. The existing literature
clearly suggests that there are multiple reasons why escalation occurs. Building
on findings presented in earlier chapters, this section provides a taxonomy of these