Question

5. Individual Problems 16-5

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 $90 million per year, but would be $120 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 $30 million in value to you.

Assuming a nonstrategic view of bargaining, you would expect to capture $______ million of this deal.

Answer 1

(i) In Egypt, you calculate that the annual value created by one distributor is $90 million per year, but would be $120 million if two distributors carried your product line.

So they only add $120-$90=$30 million in value.

Assuming a non strategic view, parties split the value that they bring to the negotiation. Therefore, each distributor gets $30/2=$15 million and you get $90 million.

(ii) Because it is government either both are negotiated or none, therefore, the margin is $120 and splitting both into halves you can keep $120/2=$60 million.

(iii) 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 $30 million in value to you.

So the marginal value of the government contract is now $120-$30 million = $90 million

So offering half of this =$45, you would expect to capture $120-$45 million=$ 75 million of this deal.