a. In 1999, Procter & Gamble and Ford Motor Co., two of the world's largest spenders on advertising, changed the way they paid their advertising agencies. Formerly, these agencies' fees were set as a percentage of each firm's total advertising spending (primarily through television, magazines, and newspapers). The agencies focused their efforts on large campaigns built around impact ads. The new system pays the agency a modest base fee (based on spending) plus an incentive fee that varies directly with the total sales of the products promoted by the ads. How do you think agencies will react to the new system? Is the new pay structure better for one or both sides than the old one? Explain.

b. Exide Corp., a worldwide battery maker, built its organizational structure on 10 separate country units. Country managers, particularly in Europe, aggressively sought to expand their sales and profits-by price cuts, exports, and advertising-frequently in competition with the company's other geographic units. In 2000, the company made a dramatic organizational change, abolishing its geographic units and dividing its structure into six global product lines (automotive batteries, industrial batteries, consumer batteries, and so on). What are the potential advantages and disadvantages of this organizational change?

c. In a proposed 2004 takeover of King Pharmaceuticals by Mylan Laboratories, Perry Corporation, an investment firm and holder of a large amount of King shares, stood to gain $28 million, but only if shareholders of Mylan approved the deal. In order to facilitate this transaction, Perry Corporation purchased 26.6 million shares of Mylan while selling short the same number of shares. The short sale gives Perry Corporation a $1 profit for every dollar that a Mylan share falls and a $1 loss for every dollar that a Mylan share increases, thus completely offsetting for Perry the effect of any share price change. Carl Icahn, the second largest shareholder and an opponent of the takeover, described Perry Corporation's move as a "travesty." Though this financial maneuver is not illegal, some corporate governance activists contend that it should be. What do you think? Explain why.1.

A plaintiff is suing a defendant for $100,000. The cost of going to court is $15,000 for each side.

a. The parties agree there is a 50 percent chance of the plaintiff's winning the case. What is the range of mutually beneficial agreements that the parties might negotiate in an out-of-court settlement? What if each side believes its winning chance is 60 percent?

b. Suppose the damages are $200,000, and each side sees its winning chance at 60 percent. What are the prospects for an out-of-court settlement?

c. Suppose the plaintiff is bringing a nuisance suit. The plaintiff has no chance of winning in court, and both sides know it. Would it be rational for the defendant to settle the case out of court nonetheless? Explain. What legal rules can you suggest that might serve to deter nuisance suits?