You are working for Bewell, a pharmaceutical company that sells a profitable drug which treats a rare condition. Both Bewell and a competitor, Salubric, have been developing an improved drug. They must each decide whether or not to put the new drug on the market. Bewell's management is currently considering its options. Although Bewell has an opportunity to get a head start, management is concerned that the market is not large enough to sustain two players. Each will make a loss if both enter. Suddenly, your boss turns to you and says: "You took econ in college. Can you help us out here? Should we make a move and introduce the new drug right now, before Salubric?" You consider briefly, then you get up, and you draw the following game tree on the conference room whiteboard: You explain your recommendation based on the backward-induction Nash equilibrium as follows: Regardless of what Bewell does, Salubric will enter. Therefore, Bewell should enter, i.e. introduce the new drug. Regardless of what Bewell does, Salubric will not enter. Therefore, Bewell should not enter, i.e. not introduce the new drug. Salubric will enter only if Bewell enters. Therefore, Bewell should not enter, i.e. not introduce the new drug. Salubric will enter only if Bewell stays out. Therefore, Bewell should enter, i.e. introduce the new drug.
You are working for Bewell, a pharmaceutical company that sells a profitable drug which treats a rare condition. Both Bewell and a competitor, Salubric, have been developing an improved drug. They must each decide whether or not to put the new drug on the market. Bewell's management is currently considering its options. Although Bewell has an opportunity to get a head start, management is concerned that the market is not large enough to sustain two players. Each will make a loss if both enter. Suddenly, your boss turns to you and says: "You took econ in college. Can you help us out here? Should we make a move and introduce the new drug right now, before Salubric?" You consider briefly, then you get up, and you draw the following game tree on the conference room whiteboard: You explain your recommendation based on the backward-induction Nash equilibrium as follows: Regardless of what Bewell does, Salubric will enter. Therefore, Bewell should enter, i.e. introduce the new drug. Regardless of what Bewell does, Salubric will not enter. Therefore, Bewell should not enter, i.e. not introduce the new drug. Salubric will enter only if Bewell enters. Therefore, Bewell should not enter, i.e. not introduce the new drug. Salubric will enter only if Bewell stays out. Therefore, Bewell should enter, i.e. introduce the new drug.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Question 5
You are working for Bewell, a pharmaceutical company that sells a
profitable drug which treats a rare condition. Both Bewell and a competitor,
Salubric, have been developing an improved drug. They must each decide
whether or not to put the new drug on the market. Bewell's management is
currently considering its options. Although Bewell has an opportunity to
get a head start, management is concerned that the market is not large
enough to sustain two players. Each will make a loss if both enter.
Suddenly, your boss turns to you and says: "You took econ in college. Can
you help us out here? Should we make a move and introduce the new drug
right now, before Salubric?" You consider briefly, then you get up, and you
draw the following game tree on the conference room whiteboard:
You explain your recommendation based on the backward-induction Nash
equilibrium as follows:
Regardless of what Bewell does, Salubric will enter. Therefore,
Bewell should enter, i.e. introduce the new drug.
Regardless of what Bewell does, Salubric will not enter.
Therefore, Bewell should not enter, i.e. not introduce the new
drug.
Salubric will enter only if Bewell enters. Therefore, Bewell
should not enter, i.e. not introduce the new drug.
Salubric will enter only if Bewell stays out. Therefore, Bewell
should enter, i.e. introduce the new drug.
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