RC Cola is considering marketing a new, fruit flavored soft drink. It hires Mark-D Design to develop the can logo and design. RC calculates that a good design raises can sales and is worth $.75 million to them. They agree to pay $.60 million for an acceptable design. Mark-D spends $.45 million on developing the logo and design. The design can be sold elsewhere for only $.15 million.
Ex-ante, what is Mark-D’s expected profit?
Ex-post, what is Mark-D’ expected profit over its next best alternative?
If RC tries to hold-up Mark-D, what is the lowest price they can offer? What is Mark-D’s profit in this case?
If RC anticipates needing can design in the future, will this change its incentive to hold-up Mark-D? Explain.