Soft selling occurs when a buyer is skeptical of the usefulness of a product and the seller offers to set a price that depends on realized value. For example, suppose a sales representative is trying to sell a company a new accounting system that will, with certainty, reduce costs by 10%. However, the customer has heard this claim before and believes there is only a 40% chance of actually realizing that cost reduction and a 60% chance of realizing no cost reduction. Assume the customer has an initial total cost of $400. According to the customer's beliefs, the expected value of the accounting system, or the expected reduction in cost, is .
Soft selling occurs when a buyer is skeptical of the usefulness of a product and the seller offers to set a price that depends on realized value. For example, suppose a sales representative is trying to sell a company a new accounting system that will, with certainty, reduce costs by 10%. However, the customer has heard this claim before and believes there is only a 40% chance of actually realizing that cost reduction and a 60% chance of realizing no cost reduction. Assume the customer has an initial total cost of $400. According to the customer's beliefs, the expected value of the accounting system, or the expected reduction in cost, is .
Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter17: Making Decisions With Uncertainty
Section: Chapter Questions
Problem 17.4IP
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Soft selling occurs when a buyer is skeptical of the usefulness of a product and the seller offers to set a price that depends on realized value. For example, suppose a sales representative is trying to sell a company a new accounting system that will, with certainty, reduce costs by 10%. However, the customer has heard this claim before and believes there is only a 40% chance of actually realizing that cost reduction and a 60% chance of realizing no cost reduction.
Assume the customer has an initial total cost of $400.
According to the customer's beliefs, the expected value of the accounting system, or the expected reduction in cost, is
.
Suppose the sales representative initially offers the accounting system to the customer for a price of $28.00.
The information asymmetry stems from the fact that the has more information about the efficacy of the accounting system than does the . At this price, the customer purchase the accounting system, since the expected value of the accounting system is than the price.
Instead of naming a price, suppose the sales representative offers to give the customer the product in exchange for 50% of the cost savings. If there is no reduction in cost for the customer, then the customer does not have to pay.
True or False: This pricing scheme worsens the problem of information asymmetry in this scenario.
True
False
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