Mindtap

1. Two equal-sized newspapers have an overlap circulation of 10% (10% of the subscribers subscribe to both newspapers). Advertisers are willing to pay $15 to advertise in one newspaper but only $29 to advertise in both, because they’re unwilling to pay twice to reach the same subscriber. Suppose the advertisers bargain by telling each newspaper that they’re going to reach agreement with the other newspaper, whereby they pay the other newspaper $14 to advertise.

According to the nonstrategic view of bargaining, each newspaper would earn

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of the $14 in value added by reaching an agreement with the advertisers. The total gain for the two newspapers from reaching an agreement is

.

Suppose the two newspapers merge. As such, the advertisers can no longer bargain by telling each newspaper that they’re going to reach agreement with the other newspaper. Thus, the total gains for the two parties (the advertisers and the merged newspapers) from reaching an agreement with the advertisers are $14.

According to the nonstrategic view of bargaining, each merged newspaper will earn

in an agreement with the advertisers. This gain to the merged newspaper is less or greater than the total gains to the individual newspapers pre-meger.

2. Your pharmaceutical firm is seeking to open up new international markets by partnering with various local distributors. The different distributors within a country are stronger with different market segments (hospitals, retail pharmacies, etc.) but also have substantial overlap.

In Egypt, you calculate that the annual value created by one distributor is $180 million per year, but would be $240 million if two distributors carried your product line.

Assuming a nonstrategic view of bargaining, you would expect to capture

million of this deal. (Hint: The two distributors are independent of each other; therefore, you conduct separate negotiations with each.)

Argentina also has two distributors that add value equivalent to the value added by the two distributors in Egypt, but both are run by the government.

Assuming a nonstrategic view of bargaining, you would expect to capture

million of this deal.

In Argentina, if you do not reach an agreement with the government distributors, you can set up a less efficient Internet-based distribution system that would generate $60 million in value to you.

Assuming a nonstrategic view of bargaining, you would expect to capture

million of this deal.

3. 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 nondrowsy allergy drugs, Claritin and Allegra, for inclusion on the formulary. The “value” or “surplus” created by including one nondrowsy allergy drug on the formulary is $172 million, but the value of adding a second drug is only $34 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 postmerger bargaining outcome?

Under the nonstrategic view of bargaining, the PBM would earn a surplus of

million, while the merged drug company would earn a surplus of

million.

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