A medical expenses billing firm wishes to hire a software firm to design its software to more efficiently handle its billing. Having the programming redesign is worth $1.5 million to the billing firm. The software firm can write and install new programs for $1.1 million. Because the software is specifically designed for the billing firm, it is worth only $.8 million to other firms.
(a) What price might the parties agree upon for the software? Explain.
(b) Describe a case where the billing firm holds-up the software firm for a lower price. What happens to the profit of each party in this case? Will the software firm go through with deal?