Essay on Freemark Abbey Winery Case

Words: 1033
Pages: 5

Baur Bektemirov

BUSF 36106: Assignment 5

Freemark Abbey Winery
Assume that under no unusual circumstances (no storm), Jaeger sells 1,000 cases of Riesling. Consider different cases: 1. Jaeger harvests grapes in anticipations of storm. Then the total revenue will be equal to 12×1000×$2.85 = $34200. 2. Jaeger doesn’t harvest and there is no storm with 50% chance. 2.1. With 40% chance, sugar concentration is 25%, then the total revenue is 12 × 1000 × $3.50 = $42000 2.2. With 40% chance, sugar concentration is 20%, then the total revenue is 12 × 1000 × $3.00 = $36000 2.3. With 20% chance, sugar concentration is below 20%, then the total revenue is 12 × 1000 × $2.50 = $30000 3. There is storm with 50% chance 3.1. Storm causes botrytis
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If it is approved, there is 50% (18% unconditional) that MicroPharma will prevent MegaPharma to market its product, and 50% (18% unconditional) chance that both companies will be on the market. The expected profit is =$359.2 million. If MegaPharma buys the rights, then it has 40% chance that the compound is approved. he expected profit is $1169.2 million. Thus, MegaPharma are willing to pay up to 1169.2 − 359.2 = 810 million USD to buy the rights. If MicroPharma doesn’t sale the rights, it has 4% chance that they will have the monopoly over compound sales, 18% that they will sue, lose the case, and share the market, and 18% chance that they will sue, win, and have the monopoly. MicroPharma’s anticipated profit is 933.61 > 810 million, i.e. there is no value that MegaPharma can offer and MicroPharma will accept. 2) Suppose that MegaPharma is able to buy the license from MicroPharma. To simplify the calculations we assume that in this case, 10% of all sales of the compound overseas will go to MicroPharma, which won’t face any additional costs. MegaPharma’s profit will be equal to 75% of the remaining sales in Europe and Japan. MicroPharma will also know that MegaPharma anticipates the sales in Europe and Japan combined to peak at $250. MegaPharma will not pay any royalties associated with the sales in the US, but MicroPharma can also market their product. We also assume that if MicroPharma fails to approve the compound, it anticipates that