Question

6 . 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 30% chance of actually realizing that cost reduction and a 70% 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 $65.00.

The information asymmetry stems from the fact that the (Buyer, or Sales representative) has more information about the efficacy of the accounting system than does the (Buyer, or Sales representative) . At this price, the customer (Will, or Will not) purchase the accounting system, since the expected value of the accounting system is (Greater, or 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.

True

False

Answer 1

Answer: False

• According to the customer's beliefs, the expected value of the accounting system, or the expected reduction in cost, is $90 ($900*10%).
• Suppose the sales representative initially offers the accounting system to the customer for a price of $99.00.
• The information asymmetry stems from the fact that the sales representative has less information about the efficacy of the accounting system than does the buyer. At this price, the customer will not purchase the accounting system, since the expected value of the accounting system is 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.

This pricing scheme worsens the problem of information asymmetry in this scenario.

Explanation for answer

Asymmetric information, also known as "information failure," occurs when one party to an economic transaction possesses greater material knowledge than the other party. In this scheme buyer knows that if product will not work, they will not have to pay. When company offers such scheme, it means that it offers a high-quality product