A Model for Pricing the License of Brand-Name Drugs Using Cooperative Game Theory

Abstract

This study examines the license valuation process of brand-name drugs using cooperative game theory. Brand-name drugs are non-generic and patented products which are produced by a domestic company licensed by the main manufacturer. To achieve the study aims, first, the pricing process of drugs in the local market is briefly described, and then, the benefits of cooperation between the foreign company and domestic company and local government are explained to show how these benefits can be presented as a licensing contract in the valuation process. Also, the advantages of licensing are described by implementing the proposed model on a sample problem. Furthermore, the factors that risk this valuation are presented by analyzing the sensitivity of the parameters of the problem. The Nash bargaining solution is also borrowed in this paper so as to consider the bargaining power of the alliance members. Our results showed that the assumption of equal negotiation power distorts the results from the common royalty rate, but when more bargaining power is considered for the government, as the legislator, the results of the proposed mechanism more resemble the conventional approaches.