Acquiring a company through the purchase of shares on the open
market and against the will of the target company’s existing
management is called a ”hostile takeover”. Such in- vestors were
known as “raiders”. All this was fictionalized in the movie Wall
Street, with Michael Douglas portraying the raider Gordon Gekko,
who famously espoused “Greed is good.” The time was full of jocular
jargon, as management could consume a “poison pill” by taking on a
costly financial structure that would make it difficult to
consummate a hostile takeover. In some cases, a raid could be
fought against by buying a raider’s shares back at a premium; this
tack became known as “greenmail,” a takeoff on blackmail. To get a
gist of the strategizing that occurred between a raider and
management, consider the game below: •N= {Raider,Management} •(Do
not Buy),(Buy, Greenmail),(Buy, No Greenmail,Take Over), (Buy,No
Greenmail,Do not Takeover) are the terminal histories. •P(∅) =
Raider, P(h) = Management for non-terminal history h= {Buy}, and
P(h′ ) = Raider for non-terminal history h′ = {Buy,NoGreenmail}
•Preferences over the terminal histories are: (Buy,Green Mail)
≻Raider (Do Not Buy) ≻Raider (Buy, No Green Mail, Takeover) ≻Raider
(Buy, No Green Mail, No Takeover)(a) Write down actions for each
player. (b) Draw the extensive form of the game. (c) Find the Pure
Strategy Nash Equilibrium of the game (d) Find the Subgame Perfect
Nash Equilibrium of the game. (e) Are PSNE and SPNE the same? If
not, explain why.
