Oculus and Maxygen are small drug companies. Oculus has obtained a patent on a new antibiotic that is effective against an emerging superbug—a bacteria that is resistant to traditional antibiotics. Unfortunately, the Oculus drug has severe side effects, making the drug unsuitable except for patients who are desperate. Ownership of this drug is worth $20 million to Oculus under the current situation. Maxygen has a patent on another drug that is of no therapeutic value in itself so the drug generates no current income for Maxygen. However, when combined in a particular way with the Oculus drug, it dramatically reduces the negative side effects. The value of the two drugs together is estimated at $55 million. Maxygen is negotiating to sell its patent to Oculus. Situations of this type are fairly common in the drug business and sales of patent rights are common. However, sometimes negotiations over such sales take a long time and sometimes negotiations are unsuccessful. Why would such wasteful outcomes occur? Nash bargaining sometimes fails because A. the parties have incomplete information. B. the parties are not concerned about payoffs. C. the parties move simultaneously. D. the parties are too honest. E. the parties are overly rational

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Oculus and Maxygen are small drug companies. Oculus has obtained a patent on a new antibiotic that is effective against an emerging

superbug—a

bacteria that is resistant to traditional antibiotics. Unfortunately, the Oculus drug has severe side effects, making the drug unsuitable except for patients who are desperate.

Ownership of this drug is worth

$20

million to Oculus under the current situation. Maxygen has a patent on another drug that is of no therapeutic value in itself so the drug generates no current income for Maxygen. However, when combined in a particular way with the Oculus drug, it dramatically reduces the negative side effects. The value of the two drugs together is estimated at

$55

million. Maxygen is negotiating to sell its patent to Oculus.

Situations of this type are fairly common in the drug business and sales of patent rights are common. However, sometimes negotiations over such sales take a long time and sometimes negotiations are unsuccessful. Why would such wasteful outcomes occur?

Nash bargaining sometimes fails because

the parties

have incomplete information.

the parties are not concerned about payoffs.

the parties move simultaneously.

the parties are too honest.

the parties

are overly rational.

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