Question

SUBJECT: GAME THEORY

Jack Walkenhorst, a young inventor, is preparing for a court hearing. Lakeland Chemical, a large conglomerate, has filed a patent application on a production process similar to one he has previously patented. If the court validates Lakeland’s application and Lakeland begins to compete with Jack, he will suffer substantial short-term losses. However, as a result of his recent research he has an important piece of private information: Another process, significantly different from and much cheaper than either of the two contested processes, is commercially feasible. If Lakeland wins the suit, and engages Jack in competition, they will ultimately lose money, and Jack will eventually recoup his losses. If Lakeland knew the true situation, they would freely choose to withdraw their patent application. But Jack cannot reveal any details of the new process without jeopardizing the new patent, for which he will not be prepared to apply for another six months. At this point, the outcome of the court case appears to be a toss-up. What can Jack do to improve his situation? In this example, Jack would like to say to Lakeland, “Believe me — If you pursue the suit, win, and engage me in competition, you will eventually regret it.” However, Lakeland cannot know whether Jack truly has something up his sleeve, or is merely bluffing in order to protect his position should he lose the case; that is, they don’t know Jack’s “type.” If the making of this statement would convince them to stay out of competition, then his nonexistent, but potential, “bluffing” type would certainly make the statement. Therefore, Lakeland’s perception of the situation will not be changed by Jack’s statement: Either of Jack’s types (his true type, or his bluffing type) would make it. Consequently, if Lakeland originally considers it unlikely that Jack has the ability to hurt them, his statement will not deter their entry. The moral of this story is that, when preparing for negotiations, we must not merely focus on the private strategy our actual type will follow: We must also consider which private strategies we would follow, were we any type other than our actual one. One can view the preparation for negotiations as a roundtable discussion among a party and his various alter egos, in which the participants must decide upon the coordinated face they will present to the outside world. Some types might wish to “bluff,” i.e., to mimic the private strategy of some other type in hope of persuading the outside world that they are that type. Other types might wish, in turn, to “signal,” i.e., to take actions which clearly reveal their actual situation. (Jack Walkenhorst might choose to drop his current suit against Lakeland as a token of faith. If this would convince Lakeland to delay competition, his actual type would gain; if the delay would be of less value to his “bluffing” type than the current 50% chance of winning the suit, then that type would not make the same offer — Dropping the suit is a signal of his true type which Lakeland can believe. Indeed, if Jack is not clever enough to think of this signal, Lakeland (or an intervenor) can suggest it to him. A formal agreement, in which Jack drops the suit in exchange for a six-month delay in Lakeland’s entry, works to the advantage of both parties and should be acceptable to both.)

QUESTIONS:

1. In the Walkenhorst case Jack had to

A) Signal to Lakeland that he had method 2

B) Signal to Lakeland that its perceptions of method 3 were wrong

C) Convince Lakeland to undertake method 2 but not method 3

D) All of the above.

2. In the Walkenhort case Jack's signal worked because

A) The signal was more costly if method 3 worked than if it didn’t work.

B) The signal was less costly if method 2 worked than if it didn’t work.

C) The signal was less costly if method 3 worked than if it didn’t work.

D) The signal was more costly if method 2 worked than if it didn’t work.

Answer 1

1. Jack had to B-signal to lakeland that its perceptions of method 3 were wrong.

This is because Lakeland believed that method 3 was not feasible, but Jack new it was. If Lakeland knew that Jack could use method 3 and produce the catalyst at an even cheaper rate, then they would know their investment would be wasted and wont go ahead.

2. The correct option is C.

The signal worked because Lakeland realized that if method 3 wasnt really feasible, then Jack would have to bear even more cost. If Jack's signal was false, and method 3 didnt work, then he would face higher costs and hence his signal showed that method 3 truly did work.