Question

Problem 9:

In the past there has been tension between Google and the Chinese government over

censorship and attacks by Chinese hackers. This question will focus on the problem associated

with the hackers. Google has chosen to Exit (moving traffic to their Hong Kong servers) but

could have chosen to Stay. China had the choice to be Tough on hackers or Soft on hackers.

The question is whether Google should have entered the market if they had known the payoffs in

advance.

The structure of the game is that Google can choose to Enter or Not Enter. If they choose

to not enter the game is over. If they choose to enter then China can choose to be Tough or Soft

on hackers. In either case, Google can then choose to Exit or Stay in the market. The game tree

is presented below. What is the equilibrium of the game?

Google China Google China Stay w Google Tough Exit -1 N Stay -6 w Enter Soft A Exit Stay out Google China 0 0

Answer 1

The equilibrium of the game can be arrived at by using the sub game perfect equilibrium approach by backward induction method. Under this method, we begin solving the game from the end nodes. On one side (the node where china plays tough) when google decides whether to Stay or Exit. Google gets 8 if it Stays and -1 if it exits. Obviously it will stay.

Now if google is on the other side of the node (where China plays Soft), then Google earns -6 by staying while -4 by exiting. Obviously it exits.

Now considering what China will do given the above stated plans of Google. If China plays tough, google will play Stay and china ends up earning 3 and if china plays soft, google will exit and china ends up earning 4.

It is in the best interest of China to play soft.

Now again Google while deciding what to play, knows that if it enters, china will play sift, itwill exit and earn -4, while if it stays out from the beginning, it earns 0. Thus Google chooses to Stay out.

Both China and Google end up earning 0.