Two firms, A and B, are each considering trying to develop a new widget. Whichever firm is first to develop the new widget wins a patent worth $20 million plus a penny. Developing a new widget involves several ‘steps’. The firms alternate moves, with A moving first, until one of them wins the patent. All moves are observed. In each turn, a firm can choose whether to take 0, 1, or 2 development ‘steps’. Taking 0 steps in a turn costs that firm $0. Taking 1 step in a turn costs $4 million. And taking 2 steps in a turn costs $11 million. For simplicity, assume a zero discount rate. Initially, each firm is 4 steps away from completing development. (a) Describe and explain carefully what will happen in this patent race and why. [Hint: it may help to read Dutta ch 12 (but notice I changed the numbers).] (b) Very briefly explain what is the economic rationale for granting ‘intellectual property rights’ such as patents. What are some disadvantages for society of granting such rights?
Two firms, A and B, are each considering trying to develop a new widget. Whichever firm is first to develop the new widget wins a patent worth $20 million plus a penny. Developing a new widget involves several ‘steps’. The firms alternate moves, with A moving first, until one of them wins the patent. All moves are observed. In each turn, a firm can choose whether to take 0, 1, or 2 development ‘steps’. Taking 0 steps in a turn costs that firm $0. Taking 1 step in a turn costs $4 million. And taking 2 steps in a turn costs $11 million. For simplicity, assume a zero discount rate. Initially, each firm is 4 steps away from completing development. (a) Describe and explain carefully what will happen in this patent race and why. [Hint: it may help to read Dutta ch 12 (but notice I changed the numbers).] (b) Very briefly explain what is the economic rationale for granting ‘intellectual property rights’ such as patents. What are some disadvantages for society of granting such rights?
Chapter8: Game Theory
Section: Chapter Questions
Problem 8.5P
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Question
Two firms, A and B, are each considering trying to develop a new
widget. Whichever firm is first to develop the new widget wins a patent worth $20 million plus a penny.
Developing a new widget involves several ‘steps’. The firms alternate moves, with A moving first, until one
of them wins the patent. All moves are observed. In each turn, a firm can choose whether to take 0, 1, or
2 development ‘steps’. Taking 0 steps in a turn costs that firm $0. Taking 1 step in a turn costs $4 million.
And taking 2 steps in a turn costs $11 million. For simplicity, assume a zero discount rate. Initially, each
firm is 4 steps away from completing development.
(a) Describe and explain carefully what will happen in this patent race and why. [Hint: it may help to
read Dutta ch 12 (but notice I changed the numbers).]
(b) Very briefly explain what is the economic rationale for granting ‘intellectual property rights’ such as
patents. What are some disadvantages for society of granting such rights?
widget. Whichever firm is first to develop the new widget wins a patent worth $20 million plus a penny.
Developing a new widget involves several ‘steps’. The firms alternate moves, with A moving first, until one
of them wins the patent. All moves are observed. In each turn, a firm can choose whether to take 0, 1, or
2 development ‘steps’. Taking 0 steps in a turn costs that firm $0. Taking 1 step in a turn costs $4 million.
And taking 2 steps in a turn costs $11 million. For simplicity, assume a zero discount rate. Initially, each
firm is 4 steps away from completing development.
(a) Describe and explain carefully what will happen in this patent race and why. [Hint: it may help to
read Dutta ch 12 (but notice I changed the numbers).]
(b) Very briefly explain what is the economic rationale for granting ‘intellectual property rights’ such as
patents. What are some disadvantages for society of granting such rights?
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