Question

11 . 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 10%. 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 $900.

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 $63.00.

The information asymmetry stems from the fact that the   has less information about the efficacy of the accounting system than does the   . At this price, the customer   purchase the accounting system, since the expected value of the accounting system is   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

The expected reduction in cost, is $36.

Reason- 10%*40%*$900= $36

10% chance of 40% fall in cost.

Suppose the sales representative initially offers the accounting system to the customer for a price of $63.00.

The information asymmetry stems from the fact that the (Sales representative) has more 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.

Reason-Since sales representative has more information about the product than the customer there is a chance of adverse selection. Price =$63 is greater than the expected value = $36, hence customer will not buy the system.

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

True

Reason- The customer still doesn't have knowledge about the product.