Pfizer has a patent on a drug that treats heartburn. If the patent is about to expire, then Pfizer has two options: It can continue to charge a high price for its product, or it can charge a low price. After the patent expires, a drug company that produces generic drugs must decide whether to enter or not enter the market. The profits for each scenario are given in the accompanying payoff table.
Generic manufacture
enters
Generic manufacture
stays out
Pfizer receives
$15 billion profit
Pfizer receives
$50 billion profit
Pfizer
charges high price
Generic receives
$10 billion profit
Generic receives
$0 profit
Pfizer receives
$10 billion profit
Pfizer receives
$25 billion profit
Pfizer
charges low price
Generic receives
-$2 billion profit
Generic receives
$0 profit
a. The Nash equilibrium when Pfizer and the generic manufacturer are making these decisions simultaneously is that
Pfizer charges a high price and the generic manufacturer enters the market