Thursday, December 29, 2011

Sentinel bargaining

Iran has supposedly captured an intact US RQ-170 Sentinel drone by jamming the signal used to control it, and then feeding it false GPS information that caused it to land in Iran instead of returning home:
Iran's success in determining the moment of the unmanned vehicle's entry and its success in transferring command of the drone's movements from US to Iranian control systems is an exceptional intelligence and technological feat in terms of modern electronic warfare.
Now, if you were Iran, why would you tell America how you captured its drone, instead of keeping it a secret and perhaps capturing a few more or at least delaying America's progress in developing countermeasures?  Maybe Iran cannot resist bragging about its conquest, like the stereotypical comic book villain. But might there be another reason?

The Sentinel is a technological jackpot for non-American military powers.  But Iran itself does not have the technology to fully exploit its find.  The Sentinel is more valuable to Russia and China, and Iran will probably end up selling/trading it to one of them.  Negotiations have already begun:
Moscow sources disclose that the price set by Revolutionary Guards commander Gen. Ali Jaafari includes advanced nuclear and missile technology, especially systems using solid fuel, the last word on centrifuges for enriching uranium and the S-300PMU-1 air defense system, which Moscow has consistently refused to sell Tehran... 
Western intelligence watchers keeping track of the Russian and Chinese teams in Tehran have not discovered where the negotiations stand at this time or whether the Iranians have taken on both teams at once or are bargaining with each separately to raise the bidding. 
So, Iran has one good and two interested bidders.  Interestingly, it could make out better if it proactively prevents itself from obtaining another Sentinel in the future!

Suppose Iran, Russia, and China respectively value the Sentinel at $100, $1000, and $1200, and suppose Iran is a relatively weak bargainer.  If Iran was just dealing with China, it would sell for somewhere between their respective valuations of $100 and $1200 -- closer to $100 since it is a weak bargainer.  But with Russia in play, Iran is sure to fetch between $1000 and $1200 from China.  (If less, Russia would surely outbid).  Further, let's suppose that Iran is such a weak bargainer that it only gets $1000.

Now suppose this happens -- the Sentinel goes to China for $1000.  And suppose that in the near future, Iran captures another Sentinel.  Surely it will want to trade this one to the remaining interested bidder (Russia), for a price between $100 and $1000.  As a weak bargainer, let's say Iran actually gets $100.

But of course, if Russia anticipates the capture of this second Sentinel, it won't be willing to bid over $100 in the first round, and so it won't force China's bid up to $1000.  Russia may as well enter a bid of $0 in the first round, in which case China can get the first Sentinel for just $100 (since Iran is such a weak bargainer).  So with two Sentinels, Iran could end up making much less than the $1000 it gets from one Sentinel! (In this extreme example it gets just $200 total).

This is equivalent to a durable goods monopoly problem, where Iran is a monopolistic "producer" of Sentinels.  It could be that it maximizes profit by restricting supply to 1 Sentinel, but it faces competition from its future self.  If so, it needs a way of committing itself to not selling more Sentinels in the future.  Which it could accomplish by bragging openly about the precise way in which it captured the first Sentinel!

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