AB has developed two new products, Product A and Product B, but has insufficient resources to launch both products. The success of the products will depend on the extent of competitor reaction. There is a 30 percent chance that competitors will take no action, a 60 percent chance that they will launch a similar product and a 10 percent chance that they will launch a better product. The profit/loss that will be earned by each of the products depending on the extent of competitor reaction is as follows: Competitor reaction Product A Product B No action £500,000 £600,000 Launch a similar product £300,000 £400,000 Launch a better product (£100,000) (£200,000) Another option for AB would be to launch neither product. If it chooses this course of action there is a 50 percent chance that competitors will take no action and there will be no effect on the company’s profit. There is a 50 percent chance that competitors will launch a new product and company profits will reduce by £150,000. Required: a) Demonstrate, using a decision tree and based on expected value, the best course of action for the company.
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AB has developed two new products, Product A and Product B, but has insufficient resources to launch both products. The success of the products will depend on the extent of competitor reaction. There is a 30 percent chance that competitors will take no action, a 60 percent chance that they will launch a similar product and a 10 percent chance that they will launch a better product.
The profit/loss that will be earned by each of the products depending on the extent of competitor reaction is as follows:
Competitor reaction |
Product A |
Product B |
No action |
£500,000 |
£600,000 |
Launch a similar product |
£300,000 |
£400,000 |
Launch a better product |
(£100,000) |
(£200,000) |
Another option for AB would be to launch neither product. If it chooses this course of action there is a 50 percent chance that competitors will take no action and there will be no effect on the company’s profit. There is a 50 percent chance that competitors will launch a new product and company profits will reduce by £150,000.
Required:
- a) Demonstrate, using a decision tree and based on expected value, the best course of action for the company.