Francisco and Priya have developed an innovative new product and applied for a patent for it.They estimate that there is an 80% chance that their patent will be approved by the US PatentOffice.
They also presented their product to ITNET, a large corporation, after having ITNET sign aconfidentiality agreement.
Yesterday, ITNET announced a new product suspiciously similar to Francisco and Priya’s. Francisco’sfirst impulse was to sue ITNET immediately. However, Priya feels that they should waituntil they have received notification of whether their patent is approved. Priya reasoned that theircase would be much stronger if they had a patent for their product.
Suppose that Francisco and Priya have a 90% chance of winning a lawsuit against ITNET if theirpatent application is approved, and that they still have a 60% chance of winning such a lawsuiteven while their patent application is under review. However, if their patent application is notapproved, the chance of winning the lawsuit would drop to 40%.
If they sue ITNET immediately (while the patent application is still under review), there is a 70%chance that ITNET would settle out of court for $400,000, and a 30% chance that ITNET wouldnot settle out of court and the suit would proceed to trial.
If Francisco and Priya win at a trial, the award would be $1 million (if they lose they get nothing).They estimate that the legal costs of a trial would be $100,000, regardless of whether they winor lose. If they wait until after the patent application has been reviewed to file suit, there is nochance that ITNET would settle out of court and the suit would go straight to trial.
(a) Use a decision tree to determine what Francisco and Priya should do (i.e. when they shouldfile their lawsuit). State the optimal decision strategy and its expected value.
(b) Draw a risk profile for the optimal decision strategy.
