Question

Marketing by the Numbers: The Value of Information Conducting research is costly, and the costs must be weighed against the value of the information gathered. Consider a company faced with a competitor's price reduction. Should the company also reduce price in order to maintain market share, or should the company maintain its current price? The company has conducted some preliminary research showing the financial outcomes of each decision under two competitor responses: the competition maintains its price or the competition lowers its price further. The company feels pretty confident that the competitor cannot lower its price further and assigns that outcome a probability (p) of 0.7, which means the other outcome would have only a 30 percent chance of occurring (1 -p-0.3). These outcomes are shown in the table below: For example, if the company reduces its price and the competitor maintains its price, the company would realize $160,000, and so on. From this information, the expected monetary value (EMV) Competitive Response Company action Maintain Price Reduce Price (1 - p)- 0. p 0.7 $160,000 $180,000 Reduce Price S120.000of each company action (reduce price or maintain price) can be determined using the following equation Maintain Price $100,000 EMV = p)(financial outcomepMet (1-p)(financial outcome(1-p)) The company would select the action expected to deliver the greatest EMV. More information might be desirable, but is it worth the cost of acquiring it? One way to assess the value of additional information is to determine the expected value of perfect information (EMVp), calculated using the following equation EMVpt EMVcrtainty- EMVbe PI where EMVcntainty- (p) (highest financial outcome,* (1 - p) (highest financial outcomei-p (1 -p) If the value of perfect information is more than the cost of conducting the research, then the research should be undertaken (that is, EMVPi7 cost of research). However, if the value of the additional information is less than the cost of obtaining more information, the research should not be conducted. 4-13 Calculate the expected monetary value (EMV) of both company actions. Which action should the company take? (AACSB: Communication; Analytical Reasoning) 4-14 What is the expected value of perfect information (EMVp)? Should the research be conducted? (AACSB: Communication; Analytical Reasoning) 4-15 Repeat 4-14 analysis for the following data. Competitive Response Maintain Reduce (1 - p) - 0.2 p-0.8 Company action Reduce Price $220,000 $200,000 Maintain Price $210,000 $170,000

Please Help!! I'm confused on the written responses to each homework

Answer 1

14.13

EMV (Reduce Price) = $160,000 x 0.7 + $120,000 x 0.3

= $148,000

EMV (Maintain Price) =  $180,000 x 0.7 + $100,000 x 0.3

= $156,000

Therefore, the company should maintain its price since the EMV with price maintenance is more.

14.14

EMV_PI= EMV_certainty - EMV_best

EMV_certainty=  $180,000 x 0.7 + $120,000 x 0.3

= $162,000

EMV_{PI =} $162,000 - $156,000= $6000

We choose EMV_best as $156,000 as this is the best response under uncertainty.

14.15

EMV (Reduce Price) = $220,000 x 0.8 + $200,000 x 0.2

= $216,000

EMV (Maintain Price) = $210,000 x 0.8 + $170,000 x 0.2

= $ 202,000

Therefore, the company should reduce its price since the EMV with price reduction is more.

Similarly,

EMV_PI= EMV_certainty - EMV_best

EMV_certainty=  $220,000 x 0.8 + $200,000 x 0.2

= $ 216,000

EMV_{PI =} $ 216,000 - $ 216,000= $ 0

We choose EMV_best as $216,000 as this is the best response under uncertainty.

EVPI or EMV_PI is a measure of how much one is willing to pay for perfect information .