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Microsoft has set the pace with a three week deadline–quickly becoming two weeks–for Yahoo to join negotiations, but Jerry Yang and company are proving that they have more strategic alternatives in their bag of tricks.

Here’s the recap for those keeping score at home (Techmeme). On Saturday, Microsoft CEO Steve Ballmer gave Yang a three-week deadline or face a proxy war. On Monday, Yahoo told Microsoft to raise its price or shut its yap. By Wednesday, Yahoo was partnering with Google on a limited ad test designed to scare Microsoft into raising its price. Microsoft said Yahoo was reaching and running into antitrust trouble. Meanwhile, Microsoft was reportedly talking to News Corp. about a joint bid for Yahoo that would combine MySpace, Yahoo and MSN. Talk about antitrust headaches. And I almost forgot the other wrinkle: Yahoo may merge with AOL instead of Microsoft.

Got all that? It’s all great theater, but Microsoft and Yahoo are really playing a big game of chicken that the portal may actually be winning. It appears that if Microsoft really wants Yahoo it will have to raise its $31 a share price. Here’s a look at the moving parts in the deal and a little handicapping:

Is outsourcing to Google a bluff or a legit alternative? Yahoo announced a two-week limited ad deal with Google designed to end right about the time Microsoft’s deadline hits. Partnering with Google was viewed as a sure fire way to nuke the Microsoft bid. But the Google gambit only works if Microsoft believes it. Would Yahoo go all the way with Google? It’s doubtful. Brian Pitz, an analyst with Bank of America, says that a Google search deal would boost search revenue and earnings in the short run, but hurt Yahoo in the long run. Pitz writes:

We believe it may not make economic sense for YHOO and its advertisers to continue running its own search ad system (Panama) to solely support advertising on YHOO’s search affiliate partners. Moreover, we believe it could be difficult for YHOO to re-sell GOOG sponsored listings to its network of affiliates, as they would likely move directly to GOOG or MSFT over time. Ask.com currently employs GOOG sponsored listings on Ask and resells these listings on its affiliate network, with the latter’s margins being pressured.