07 Jun Question 1.4 Anders and Michael were classmates in colleg
Question
1.4 Anders and Michael were classmates in college. In their spare time
while undergraduates, they developed a software product that regulates traffic on
internet sites. Their product uses very imaginative and original ideas, and they
have applied for a patent. They estimate that there is an 80% chance their patent
will be approved by the US Patent Office.
Anders and Michael have also formed a start-up company called ITNET, and
they have started to market their software product. Last month, they presented some
of their ideas tof Singular, Inc., the dominant player in this growing market, after Singular
had signed a confidentiality agreement with ITNET that ITNET’s lawyer had
prepared.
Yesterday, Singular announced a new software product that seemed suspiciously
similar to the one that Anders and Michael have developed. Anders’ first reaction
was to plan to sue Singular immediately. However, Michael felt that they should wait
until they have received notification of their patent, which is still pending before the
U.S. Patent Office. Michael reasoned that their case would be much stronger if they
had a patent for their product.
Suppose that Anders and Michael have a 90% chance of winning a lawsuit
against Singular if their patent application is approved, and that they still have a 60%
chance of winning such a lawsuit even while their patent application is pending (because
Singular had signed the confidentiality agreement). However, if their patent application
is not approved, suppose that the chance of winning the lawsuit would drop
to 40%.
Anders feels that if they sue Singular immediately, there is a 70% chance that
Singular would settle out of court for $400,000, and a 30% chance that Singular
would not settle out of court. If they win the lawsuit, their settlement would be $1
million. However, they estimate that the legal costs of going to court would be
$100,000.
(a) Structure ITNET’s problem of whether or not to sue Singular as a decision tree.
(b) Solve for the optimal decision strategy.
(c) Singular informally Makes a “now-or-never” offer to buy Anders’ and Michael’s Software for $500000. Should Andres and Michael agree to this offer?
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