Chapter 11.4, Problem 34P

Suppose that GLC earns a $2000 profit each time a person buys a car. We want to determine how the expected profit earned from a customer depends on the quality of GLC’s cars. We assume a typical customer will purchase 10 cars during her lifetime. She will purchase a car now (year 1) and then purchase a car every five years—during year 6, year 11, and so on. For simplicity, we assume that Hundo is GLC’s only competitor. We also assume that if the consumer is satisfied with the car she purchases, she will buy her next car from the same company, but if she is not satisfied, she will buy her next car from the other company. Hundo produces cars that satisfy 80% of its customers. Currently, GLC produces cars that also satisfy 80% of its customers. Consider a customer whose first car is a GLC car. If profits are discounted at 10% annually, use simulation to estimate the value of this customer to GLC. Also estimate the value of a customer to GLC if it can raise its customer satisfaction rating to 85%, to 90%, or to 95%. You can interpret the satisfaction value as the probability that a customer will not switch companies.