Your firm must decide whether or not to introduce a new product.
If you do so, then your rival may clone it and start producing a product that is very similar to yours.
The one-time cost of developing the product for you is $100 million, the one-time cost of cloning for your rival is $40 million.
If your rival copies your product, the present value of the stream of profits each of the two firms receives (except for any fixed costs) is $60 million.
If you introduce the product but the rival doesn't copy it, the present value of the stream of profits you will receive is $150 million, while your rival gets nothing.
If you do not introduce the new product, then neither you nor your rival earn any profit.
a. Present this game in extensive form (a tree). IMPORTANT
b. If you introduce the new product, what are the chances your rival will clone it? Explain.
c. Should you develop and introduce the new product under the given circumstances? Explain.
d. Suppose you can buy a patent granting you exclusive rights for this product for its entire lifecycle. What is the value of such a patent to you? (In other words, up to what amount are you willing to pay for such a patent?)
e. If you had to make an argument convincing the government that you should be granted such a patent or any other form of intellectual property protection, what argument would you make?