In: Economics
5. Individual Problems 19-5
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 20%. 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 $500.
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 $70.00.
The information asymmetry stems from the fact that the(buyer/sales representive) has less information about the efficacy of the accounting system than does the (buyer/sales representive) . At this price, the customer (will/will not) purchase the accounting system, since the expected value of the accounting system is (greater/less) than the price.
Instead of naming a price, suppose the sales representative offers to give the customer the product in exchange for 50% of the cost savings. If there is no reduction in cost for the customer, then the customer does not have to pay.
True or False: This pricing scheme worsens the problem of information asymmetry in this scenario.
Answer:-
40%(500*20%) =$ 40
This pricing scheme worsens the problem of information asymmetry in this scenario.