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 20% chance of actually realizing that cost reduction and a 80% chance of realizing no cost reduction. Assume the customer has an initial total cost of $200. 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 20% chance of actually realizing that cost reduction and a 80% chance of realizing no cost reduction. Assume the customer has an initial total cost of $200. According to the customer's beliefs, the expected value of the accounting system, or the expected reduction in cost, is $____
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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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 20% chance of actually realizing that cost reduction and a 80% chance of realizing no cost reduction.
Assume the customer has an initial total cost of $200.
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 $12.00.
The information asymmetry stems from the fact that the ______(sales rep or buyer) has less information about the efficacy of the accounting system than does the ______(sales rep or buyer) . At this price, the customer _____ (will or will not) purchase the accounting system, since the expected value of the accounting system is ______(less or greater) 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 alleviates some of the information asymmetry that is present in this scenario.
True
False
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