Since the probabilities of competitive response are not equal, we will calculate the expected value for each of the scenario and select the scenario where the expected value is more. The expected value can be calculated as below:
Expected value (X) = X1p1 + X2p2 + X3p3 + ..... where pn represents the probability of occoring event Xn
In this case, Expected value = Value if competitor maintained price * Probability of maintaining price + Value if competitor reduced price * Probability of reducing the price
1. Company monetary value if the price is reduced:
Expected value = 165000 * 0.6 + 135000 * 0.4 = $ 153,000
2. Company monetary value if the price is maintained:
Expected value = 175000 * 0.6 + 115000 * 0.4 = $ 151,000
Since the expected value is more if the company reduces price, price should be reduced
consider a company faced with a competitor’s price reduction. Should the company also reduce price in...
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