Managerial Economics: A Problem Solving Approach
5th Edition
ISBN: 9781337106665
Author: Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher: Cengage Learning
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Question
Chapter 16, Problem 16.6IP
a)
To determine
The likely bargaining negotiation outcome.
b)
To determine
The post-merger bargaining outcome.
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Pharmaceutical Benefits Managers (PBMs) are intermediaries between upstream drug manufacturers and downstream insurance companies. They design formularies (lists of drugs that insurance will cover) and negotiate prices with drug companies. PBMs want a wider variety of drugs available to their insured populations, but at low prices. Suppose that a PBM is negotiating with the makers of two non-drowsy allergy drugs, Claritin and Allegra, for inclusion on the formulary. The “value” or “surplus” created by including one non-drowsy allergy drug on the formulary is $80 million, but the value of adding a second drug is only $24 million. Assume the PBM bargains by telling each drug company that it's going to reach an agreement with the other drug company. Under the non-strategic view of bargaining, the PBM would earn a surplus of_____million, while each drug company would earn a surplus of ________million. Now suppose the two drug companies merge. What is the likely post merger bargaining…
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A drug dealer knows whether his supply is high quality (@ = H), mediocre (@ = M), or low quality (@ = L). He values his product at $30 if it is high quality, $20 if it is mediocre, and $10 if it is low quality. A potential buyer values the drugs at $30 + x if they are high quality, $20 + x if mediocre, and $10 + x if low quality, where 0 < x < $5. The buyer does not know the quality of the product - he only knows that each quality is equally likely : Pr(@ = H) = Pr(@ = M) = Pr(@ = L) = 1/3. The buyer offers a price p for the drugs, which the dealer can either accept or reject. Assume if the dealer is indifferent, then he accepts.
1. In equilibrium, which drug qualities are sold, and at what price?
2. Now, suppose Pr(@ = H) = Pr(@ = L) = 1/4, while Pr(@ = M) = 1/2. Find the values of x for which mediocre drugs will be sold?
Chapter 16 Solutions
Managerial Economics: A Problem Solving Approach
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