Question

Markov Analysis 2. Management of a Milk Chocolate Galore company believes that the probability of a customer purchasing its MilkyChoc or the company’s major competition, ChocoMilk, is based on the customer’s most recent purchase. Suppose that the following transition probabilities are appropriate:

To

From                                                  MilkyChoc                         ChocoMilk

MilkyChoc                                              0.8                                       0.2

ChocoMilk                                              0.3                                       0.7

a. Show the two-period tree diagram for a customer who last purchased MilkyChoc. What is the probability that this customer purchases MilkyChoc on the second purchase?

b. What is the long-run market share for each of these two products?

c. A MilkyChoc advertising campaign is being planned to increase the probability of attracting ChocoMilk customers. Management believes that the new campaign will increase to 0.40 the probability of a customer switching from ChocoMilk to MilkyChoc. What is the projected effect of the advertising campaign on the market shares?

Answer 1