1 Jersey Pharmaceuticals produces a highly profitable drug b

1. Jersey Pharmaceuticals produces a highly profitable drug, but the patent on the drug is about to expire and General Generic has indicated that they wish to produce a generic equivalent for the drug once the patent expires. Jersey wishes to discourage General Generic\'s entry into this market. It can do so potentially by producing a large amount of the drug, thus making a generic equivalent unprofitable. Listed below is a payoff matrix for Jersey\'s and Generic\'s decisions: Jersey can produce either a low or high output, and General must decide whether to enter the market or not General Generic Don\'t Enter Enter 12,0 High Output Jersey 5,-2 Low Output 6,6 8.0 Define Nash equilibrium. Suppose both firms move simultaneously. What are the Nash equilibrium(s) for this game? Explain Suppose however, that Jersey moves first. Will Jersey successfully deter entry? Explain your answer. Is there a first-mover advantage for Jersey? a. b.

Solution

a. A Nash equilibrium is where each player does the best he can given what the other player does in the game. In this case we have two Nash equilibria given by (Low Output, Enter) and (High Output, Dont Enter) with payoffs of (6,6) and (12,0) respectively.

b. If Jersey plays Low Output then General Generic will enter, so Jersey must play high output to prevent entry, that is play a strategy that is worse for himself. This is the only way he can prevent entry. Jersey does have a first mover advantage.