Anders and Michael were classmates in college. In their spare time while undergraduates, they developed a

software product that regulates traffic on the internet sites. Their product uses very imaginative and original

ideas, and they have applied for a patent. They estimate that there is an 80% chance that their patent

will be approved by the US patent office. Anders and Michael have also formed a start-up company called

ITNET, and they have started to market their software product. Last month, they presented some of their

ideas to Singular Inc., the dominant player in this growing market, after Singular had signed a confidentiality

agreement with ITNET that ITNET's lawyers had prepared.

Yesterday, Singular announced a new software product that seemed suspiciously similar to the one that Anders

and Michael have developed. Anders' first reaction was to plan to sue Singular immediately. However, Michael felt that they should wait until they have received notification of their patent, which is still pending before

the U.S. Patent office. Michael reasoned that their case would be much stronger if they had a patent for their

product.

Suppose that Anders and Michael have a 90% chance of winning a lawsuit against Singular if their patent

application is approved, and that they still have a 60% chance of winning a lawsuit even while their patent

application is pending (because Singular had signed the confidentiality agreement). However, if their patent

application is not approved, the chance of winning the lawsuit would drop to 40%. Anders feels that if they

sue Singular immediately, there is a 70% chance that Singular would settle out of court for $400,000 and a

30% chance that Singular would not settle out of court. If they win the lawsuit, their settlement would be $1

million. However, they estimate that the legal costs of going to court would be $100,000.

(a) Structure ITNET's problem of whether or not to sue Singular as a decision tree. Clearly indicate what

are the decisions to be made and what are the uncertain events.

(b) Solve for the optimal decision strategy. Describe the optimal strategy. What is your recommendation?