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?

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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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?
 
 
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