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Sequential Decisions 515

How do we account for the superiority of first pursuing the biogenetic

method? To answer this question, let’s compare the actions under the sequen-

tial and simultaneous programs. The actions are the same in each case, except

when the biogenetic program achieves immediate success. Here the company

need not pursue the biochemical program and so saves the $10 million invest-

ment—a sum it would have spent under simultaneous development. This sav-

ing occurs 20 percent of the time (when the biogenetic program is successful).

Pursue

biochemical

Pursue

biogenetic

program

first

Biogenetic

succeeds

Biogenetic

fails

Do not pursue

biochemical

Biochemical

not perfected

Biochemical

perfected

74.4

.8

.2

48

$180

48

.7

.3

$20

$60

–$20

FIGURE 12.5

Sequential R&D:

Biogenetic First

By trying the

biogenetic program

first (and following

with the other

program if necessary),

the drug company

maximizes its expected

profit.

FIGURE 12.6

Summary of

Pharmaceutical

Company’s R&D

Options

Simultaneous R&D

$72.4

Biogenetic R&D

$20

Sequential R&D: biochemical first

$72.4

Sequential R&D: biogenetic first

$74.4

Biochemical R&D

$68

Do not invest

$0

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