# Consider a company faced with a​ competitor's price reduction. Should the company also reduce price in order to maintain market share or should the company maintain its current​ price? The company has conducted some preliminary research showing the financial outcomes of each decision under two competitor​ responses: the competition maintains its price or the competition lowers its price further. The company feels pretty confident that the competitor cannot lower its price further and assigns that outcome a probability ​(p​) of 0.8​, which means the other outcome would have only a 20 percent chance of occurring ​(1-p=0.2​). These outcomes are shown in the table​ below:Competitive ResponseCompany action Maintain Price, p=0.8 Reduce Price, (1-p)=0.2Reduce Price \$165,000 \$125,000Maintain Price \$175,000 \$105,000The expected monetary value​ (EMV) of reducing the price is

Financial And Managerial Accounting
15th Edition
ISBN:9781337902663
Author:WARREN, Carl S.
Publisher:WARREN, Carl S.
Chapter20: Cost-volume-profit Analysis
Section: Chapter Questions
Problem 4TIF: Profitability strategies Somerset Inc. has finished a new video game, Snowboard Challenge....
Question

Consider a company faced with a​ competitor's price reduction. Should the company also reduce price in order to maintain market share or should the company maintain its current​ price? The company has conducted some preliminary research showing the financial outcomes of each decision under two competitor​ responses: the competition maintains its price or the competition lowers its price further. The company feels pretty confident that the competitor cannot lower its price further and assigns that outcome a probability ​(p​) of 0.8​, which means the other outcome would have only a 20 percent chance of occurring ​(1-p=0.2​). These outcomes are shown in the table​ below:

Competitive Response
Company action Maintain Price, p=0.8 Reduce Price, (1-p)=0.2
Reduce Price \$165,000 \$125,000
Maintain Price \$175,000 \$105,000

The expected monetary value​ (EMV) of reducing the price is

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