Oculus and Maxygen are small drug companies. Oculus has obtained a patent on a n

Question

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 $10 (million) to Oculus under the current situation. Maxygen has a patent on another drug that has 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 $50 (million). Maxygen is negotiating to sell its patent to Oculus.

What price would be implied by the Nash bargaining solution?

Explanation / Answer

As per Nash bargaining solution

The selling price of the patent of Oculus will be:-

Np=(50-P)(P-10)=50P-P2-500+10P=60P-P2-500

dNp/dP = 60-2P

for profit maximization, dNp/dP=0

60-2P=0

P=30

Thus from above it is clear that Nash Bargaining solution for the deal would be $30million

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