Question

Bertaline and AlphaOmega are small drug companies. Bertaline has recently signed an agreement with a big pharmaceutical company from India, and obtained from them a patent on a new antibiotic that is effective against some bacteria that are resistant to other drugs that are currently in the market. Unfortunately, after running some tests, the company realized the drug had severe side effects, making it unsuitable except for patients who expected desperately to have a drug that could help them. Ownership of this drug is worth $60 (million) to Bertaline under the current situation. AlphaOmega, through their own development, obtained a patent on another drug that is of no therapeutic value in itself, generating no current income currently for the company. However, when combined in a particular way with the Bertaline antibiotic, it dramatically reduces the negative side effects. The value of the two drugs together is estimated at $100 (million). AlphaOmega intends to sell its patent to Bertaline and it is negotiating to do that ASAP. What price would be implied by the Nash bargaining solution?

Answer 1

Since the combined value of the drug is $100 million and Bertrand has obtained it at $60million, so the total profit that they can have is $40 million.

Now, AlphaOmega has 0 payout now and maximum payout of $40 million if they sell.

Bertrand has -60 now and maximum of $40 million if they buy.
So Bertrand will obviously want to buy even if the price is $1 less than $40 million.

Again AlphaOmega will sell if the price is just $1.

So since the best case scenario is for both to collaborate, so it would be better to split the profits.

Hence the selling price for AlphaOmega should be $20million.