Question 1 was easy. Questions 2 and 3 were both difficult. In Question 2 the main difficulties were in computing expected payoffs and in realizing that the service contract is so unattractive that a salesman might prefer a smaller probability of winning with no service to a guaranteed win with service. In question 3, the main difficulty was in noticing the effect of New Mexico's withdrawal on the probability the other states win and the possibility that the coalition will unravel, states settling one at a time as the probability of victory declines with the number of remaining states.
There are a total of 30 points.
1. Consider the following 3x3 game.
(a) (3 point) Name all of the dominant strategies.
ANSWER: None.
(b) (3 points) Name all of the dominated strategies.
ANSWER: For Firm 1, West is strongly dominated by East. For Firm 2, Midwest is dominated by West. Midwest is only weakly dominated-- if Firm 2 chooses Midwest or East it is no worse than West-- but Firm 2 cannot do worse, and might do better by choosing West.
(c) (4 points) Name all of the Nash equilibria.
(East , East) and (Midwest, West)
Firm 2
West Midwest East
West -2, 3 -3,1 -2,2
Firm 1 Midwest 2,4 -2,4 -2,-1
East 0, -1 0,-1 0, 0
2. (10 points) Three salesmen, Curly, Moe, and Larry, are trying to
sell electrical generators to a large customer. Price is not the
focus: rather, it is whether service will be included in the contract
or not. Each seller would profit by 5 if service is not included,
and 1 if service is included. If all the offers are equal, Curly
wins the order with probability .5, Moe with probability .4, and
Larry with probability .1. If some offers include service and
others do not, however, the offers that do not include service are
rejected for sure. If Moe and Curly offer service, and Larry does not,
for example, then Larry's probability falls to zero, Curly's rises to
.55, and Moe's rises to .45. The offers are made in sequence, and publicly. First Larry offers, then Moe, and then Curly. What happens?
ANSWER. Work back from the end. If anybody else has offered service, so will Curly. If nobody has, then Curly would get the offer for sure if he offered service, for an expected payoff of 1, but would win with probability .5 if he didn't offer service, for an expected payoff of 2.5. Thus, Curly will not offer service if nobody else did.
How about Moe? He will offer service if Larry did, since otherwise he gets zero. But if Larry did not, then Moe won't either. If he did, so would Larry, and it wouldn't end up helping Moe in the end.
How about Larry? He knows that his service offer would just be matched by the others, so he will not offer service, preferring his probability .1 of getting the payoff of 5.
Thus, none of them will offer service.
(You could also work this out with a game tree-- a more reliable method, but harder for me to post on the web.)
3.
It is standard for lawsuits to settle out of court before a
decision is reached at trial. The attached clipping tells of a more
unusual settlement ("New Mexico cuts deal with Microsoft. State
settles
antitrust suit; others vow to pursue case," Brier Dudley and John
Hendren, The Seattle Times 07/13/2001, A1). (a) (4 pts) Why would Microsoft agree to give New Mexico the same benefit from any final court judgement against Microsoft that New Mexico would have gotten if it had not settled out of court?
ANSWER. This is a question about looking ahead to the effect of New Mexico's settlement on what happens in court and on possible future settlements. There are two possibilities, both relying on the probability of a court defeat falling as a result of this settlement. First, with fewer states putting their legal resources into the legal battle, the probability that Microsoft loses falls when New Mexico exiting the case. If the settlement process were to continue, and all but one state exited, that state would have to bear the burden of the case alone. Second, if all the remaining states settle too, the settlements will be small because they will foresee that Microsoft will not be defeated in court. Then New Mexico gets little more than the $100,000 for legal fees. The essential point is that by promising New Mexico the same benefit as other states, Microsoft gets New Mexico to drop from the coalition, reducing the benefit the other states (and New Mexico) will get.
(b) (3 pts) Is it possible that every state, including New Mexico, would prefer a legal regime in which they were not allowed to settle their cases separately?
ANSWER. Yes. That solves their free rider problem. If they can each settle separately, more "New Mexicos" might happen, and the probability of defeating Microsoft would fall--- which means, looking ahead, that Microsoft's settlement offers would not be generous. If they can't settle separately, Microsoft must make a settlement offer based on the much higher probability that it would be defeated in court when faced by all the states together.
(c) (3 pts) What is a scenario that makes sense out of New Mexico's behavior?
ANSWER: One scenario which makes sense of New Mexico's behavior is that no other state will settle separately and they will keep fighting the case almost as hard as before. Then New Mexico will have its legal fees paid and get just as big a share. This scenario seems to be what really happened.
A second scenario which makes sense of New Mexico's behavior is that if New Mexico does not settle first, some other state will, and New Mexico, settling later, will get even less than $100,000.
News
New
Mexico yesterday agreed to settle its antitrust case against
Microsoft, breaking ranks with 18 other states and the Department of
Justice.
It remains to be seen whether others will follow and bring the 3-
year-old case closer to a conclusion, but leaders of the state
coalition vowed to press on. The
settlement comes a day after Microsoft said, in response to an
appeals-court ruling in the landmark case, that it would alter
licenses for its Windows XP and earlier operating systems to give
computer makers more flexibility.
On June 28, the Court of Appeals for the District of Columbia
ruled Microsoft was a monopoly, dismissed portions of the case and
sent other parts back for further review in U.S. District Court. The
parties may continue the case in the lower court, appeal to the
Supreme Court or settle.
New Mexico Attorney General Patricia Madrid said she
acted
independently but hopes her move "provides a road map for the parties
to go forward with a settlement."
"It's either going to be that or protracted litigation for
potentially years," she said in an interview.
Under the settlement, Microsoft will pay New Mexico's
legal fees,
about $100,000. The state would also receive a share of any financial
penalties the company would pay.
Madrid said she decided last month to settle, in part because she
believes the breakup remedy sought by the states would do too much
harm to a company that "has been one of the primary engines driving
the New Economy and has delivered significant benefits to our
nation's citizens."
"Without a doubt, Microsoft must account for its past misconduct,
but I would caution against exacting a penalty that could have far-
reaching and detrimental effects on the country's consumers and
businesses as a whole," she said in her announcement.
Noting that the appeals court found Microsoft liable for illegally
maintaining its monopoly, she said, "We have won what I wanted to
win."
Microsoft was founded in Albuquerque in 1975. Earlier this year,
co-founder Paul Allen purchased a strip mall that now houses the
original site, amid reports he was considering developing a museum
there.
Federal prosecutors silent
Justice Department officials declined to comment on the
settlement, as did some Microsoft competitors who have supported the
government's litigation. But two attorneys general who have led the
states' case said New Mexico's exodus makes little
difference.
"This will not hamper the states," Iowa's Tom Miller said. "We
will go full speed ahead on this case."
Sandra Michioku, a spokeswoman for California's Bill Lockyer, said
she didn't think New Mexico's settlement "will have any
effect."
Miller described Madrid's action as a lone decision by a
financially minded official who inherited the case from her
predecessor, Tom Udall.
Miller chided Madrid for striking what other observers called a
"free rider" deal that allows New Mexico
to reap any benefits from a
battle others will continue to fight.
"We look forward to sharing the benefits of any settlement or
judicial decision with her through the `most-favored-nation' clause
she has with Microsoft," Miller said.
Microsoft's allies described New Mexico as the first
domino to
fall, with more likely to come. (While the case was in the testimony
phase in 1998, South Carolina withdrew from the state coalition.)
"I think it's part of a positive trend," said Jonathan Zuck,
president of the Association for Competitive Technology, an
organization that has sided with Microsoft.
"It could have widespread ramification across the country."
Zuck described Miller and Connecticut Attorney General Richard
Blumenthal as hard-liners out of touch with the public and their more
conciliatory colleagues, who were more likely to follow Madrid's
example.
Utah Attorney General Mark Shurtleff still wants to discuss a
settlement "involving all the parties, the federal government and all
the plaintiff states, and not to consider doing a single action like
New Mexico did," spokesman Paul Murphy said.
Representatives of the Wisconsin and Illinois attorneys general
said the situation was under review and had no comment.
After the appeals-court ruling, Microsoft Chairman Bill Gates said
the company wants to settle the case and move on. In an apparent
attempt to spur settlement talks, the company Wednesday acknowledged
that some of its licensing practices were illegal and announced new
terms.
Computer makers may now alter the desktop of the Microsoft
operating system, add icons linking to other programs and enable
users to remove Microsoft's Internet Explorer browser controls.
Microsoft spokesman Vivek Varma refused to say whether the company
is talking with other states.
Working for resolution
"We're pleased to resolve this matter with the state of New
Mexico
and we thank Attorney General Madrid for her leadership in working
out an agreement," he said. "We are committed to working with the
federal government and the remaining state attorneys general to
resolve the remaining issues in this case."
Ernest Gellhorn, an antitrust expert at George Mason University in
Virginia, said Microsoft is apparently seeking to pick off the states
most amenable to settling so that the company can cut a deal with
fewer remaining players.
The "free rider" clause is especially attractive to
states content
to leave the hard negotiations to their more aggressive colleagues in
Iowa, Connecticut, New York and California.
"It's the start of the settlement process," Gellhorn said. "It's a
good political way to get other states to join."
That might not work, said Jeff Eisenach, president of the Progress
and Freedom Foundation, which has urged a breakup.
"I think what it suggests is that Microsoft's strategy of letting
people put things on the desktop is helping at least in one state,"
he said.
"At the end of the day, I think this case is going to be worked
out in the courts."
Madrid did praise the company for softening its stance toward
computer makers, but said she made up her mind in June.
She said she approached company officials in Washington, D.C., and
continued negotiations at a National Association of Attorneys General
meeting June 19 to 23 in Vermont.
At the same meeting, Microsoft rivals lobbied the attorneys
general to step up their case. They contend Microsoft is further
abusing its monopoly power by bundling a music and video player and
other programs into Windows XP, which is due out in late October.
Brier Dudley can be reached at 206-515-5687 or
bdudley@seattletimes.com. John Hendren can be reached at 206-464-
2772 or jhendren@seattletimes.com.
photo;
Caption: Patricia Madrid
New Mexico cuts deal with Microsoft
State settles antitrust suit; others vow to pursue case
Brier Dudley and John Hendren
Seattle Times staff reporters
07/13/2001
The Seattle Times
Fourth
A1
(Copyright 2001)