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3. (*) A firm (F) sells a software to its customers. Suppose a customer (C) purchases a license for the software package, agreeing to certain

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3. (*) A firm (F) sells a software to its customers. Suppose a customer (C) purchases a license for the software package, agreeing to certain restrictions on its use. However, C has an incentive to violate these rules. The standard outcome, in which C complies and F does not inspect leads to normalized payoffs of (0,0). Without inspection, the consumer prefers to cheat since that gives her a payoff of 10, with resulting negative payoff of -10 for the firm. The firm could also verify that the consumer is abiding by the agreement, but doing so requires an inspection which has a unitary cost (c = -1). If the firm inspects and the consumer cheats, the inspection will result in a heavy penalty for the consumer (payoff of -P

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