Recently, Pfizer and Allergan—the makers of Viagra and Botox, respectively—initiated a $160 billion merger. Pharmaceutical companies tend to spend a greater percentage of sales on R&D activities than other industries. The government encourages these R&D activities by granting companies patents for drugs approved by the Food and Drug Administration. For instance, Allergan spent large sums of money developing its popular wrinkle-removing neurotoxin, Botox, which is currently protected under a patent. Botox sells for about $15 per vial. Calculate the Lerner index if the marginal cost of producing Botox is $1.50 per vial. Does the Lerner index make sense in this situation?

Recently, Pfizer and Allergan—the makers of Viagra and Botox, respectively—initiated a $160 billion merger. Pharmaceutical companies tend to spend a greater percentage of sales on R&D activities than other industries. The government encourages these R&D activities by granting companies patents for drugs approved by the Food and Drug Administration. For instance, Allergan spent large sums of money developing its popular wrinkle-removing neurotoxin, Botox, which is currently protected under a patent. Botox sells for about $15 per vial. Calculate the Lerner index if the marginal cost of producing Botox is $1.50 per vial. Does the Lerner index make sense in this situation?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter13: best-practice Tactics: Game Theory

Section: Chapter Questions

Problem 1E

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In 1896, Colgate dental cream was introduced in tubes similar to those we use now. Today, the Colgate-Palmolive Company’s brand of toothpaste is the best-selling toothpaste in the world (ahead of the Crest brand marketed by Procter & Gamble, which was introduced in 1955). While Colgate and Crest enjoy the lion’s share of the toothpaste market, if you view the oral care shelf at your local drugstore or supermarket, you will find over a hundred different varieties of toothpaste. Colgate alone sells over 40 different varieties that are marketed under names ranging from Shrek Bubble Fruit to Colgate Total Advanced Whitening. The high level of product differentiation in the toothpaste market stems from firms introducing new varieties in an attempt to boost their economic profits. In environments where makers of other brands (such as Crest) can easily enter profitable segments of the market, a profitable strategy is to attempt to quickly cover that segment (introducing Shrek Bubble…
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While there is a degree of differentiation between major grocery chains like Albertsons and Kroger, the regular offering of sale prices by both firms for many of their products provides evidence that these firms engage in price competition. For markets where Albertsons and Kroger are the dominant grocers, this suggests that these two stores simultaneously announce one of two prices for a given product: a regular price or a sale price. Suppose that when one firm announces the sale price and the other announces the regular price for a particular product, the firm announcing the sale price attracts 1,000 extra customers to earn a profit of $5,000, compared to the $3,000 earned by the firm announcing the regular price. When both firms announce the sale price, the two firms split the market equally (each getting an extra 500 customers) to earn profits of $2,000 each. When both firms announce the regular price, each company attracts only its 1,500 loyal customers and the firms each earn…