Game Theory

“That in the capacity expansion game, you want to move first. By moving first, you scare the opposition into not expanding, boosting profitability. The difficulty of course is that the right to move is not handed out but to be seized. Some sellers attempt just this with announcements about plant expansions. However, unless such announcements are credible, they do little to deter rivals.One setting where a seller has the ability to move first is in pharmaceuticals.

When the patent upon a particular drug expires, it is subject to competition from generic versions of the same. Some patent holders choose to introduce their own generic before expiration of the patent. This has the obvious negative effect of cannibalizing sales of the patented product. This is offset by preemption effect. Expanding first in the generic category will reduce the scale at which other generic produces will enter the market. Upjohn for example, succeeded in controlling 90% of the generic market for its patented drug Xanax by introducing its own generic substitute one month before expiration of the Xanax patent. Syntex introduced its own generic version of its patented drug Naprosyn two months before patent expiration with similar success.”