Suppose that you are a manager at a giant pharmaceutical company like Pfizer. Your firm is competing with another giant to purchase a small, cutting-edge biotechnology company. You and other executives at your firm are tasked with determining whether to make an offer. You can make a high offer or a low offer, but you realize that after you make your offer, your competitor’s managers must decide whether to top that offer.

You create the game tree at the top of the next page with estimates of economic profit for both firms. In the payoff rows, Y is your firm’s economic profit, and C is your competitor’s economic profit. Should you make an offer? If so, should it be a high offer or a low offer?

Transcribed Image Text:

Make higher High offer Competitor offer Y: SO C: - $100 Million Your firm Low offer Competitor Do not make Make higher offer offer Do not make offer Y: $300 Million Y: $0 C: $0 C: $500 Million Y: $700 Million C: $0