Question

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 $300.

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 $42.00.

The information asymmetry stems from the fact that the (SALES REPRESENTATIVE / BUYER) has more information about the efficacy of the accounting system than does the (SALES REPRESENTATIVE / BUYER) . At this price, the customer (WILL / WILL NOT) purchase the accounting system, since the expected value of the accounting system is (LESS/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 worsens the problem of information asymmetry in this scenario.

True

False

Answer 1

Solution :-

Given that the customer has an initial cost of $300. He/she believes that by purchasing the new accounting software,costs would reduce by 20% by probability of 40% but there is a 60% probability that there is no cost savings.

So,the equation (expected value of using the new accounting system :

(0.20 * 240) + (0.80*300) i.e., $288

So the expected cost in the reduction is ($300 - $288 ) = $12

The information asymmetry occurs from the fact that the buyer has less info about the efficiency of the accounting system than does the Sales Representative.

At this price,the customer will not purchase the accounting system, since the expected value of the accounting system is less than than the price.

Initial cost savings = 10% i.e., (0.10 * 300) i.e., $30

So , the seller offers it at $15 (50% of savings)

False - This pricing scheme does not alleviate some of the information asymmetry that is recent in this scenario because here,the initial cost is already known i.e., $300

In case this cost is not known, this pricing scheme would have alleviate the information asymmetry