CASE STUDY PRESENTATION

Submitted By:

Aayush Srivastava - 12/EE/89

Shubam Kr Gupta 12/EE/54

Anshu 12/EE/57

Ravitej 12/EE/87

Rishabh Kumar 12/EE/01

Sourav Roy 12/EE/59

Surajit Shah 12/EE/64

Krishan Kant 12/EE/83

Vishal Thakur 12/EE/77

Chhandak Biswas 12/EE/78

Pawan Kr Yadav 12/EE/81

A marketing manager who has to decide on pricing a new product is in a

dilemma. His company has just developed a new customer product and it is to
be introduced in the market. The manager has three options, viz, to adopt
skim-pricing, penetration pricing, or fix the price of the new product
somewhere in between the two extremes.

The marketing manager knows that the desirability of fixing any of these
three prices ultimately depends on the extent of demand for the new
product. After considerable thought and consultations with his senior
colleagues, he has developed the following pay-off table.
TABLE: 1
Alternatives
Light Demand ( S1)

State of Nature
Moderate Demand(S2)

Heavy Demand( S3)

Skimming Price A1

60

30

-30

Intermediate Price A2

30

60

-15

Penetration Price A3

-30

45

Based on his past experience and knowledge of the possible substitutes for
the new product, the marketing manager thinks that the probabilities of
having (i) light demand (ii) moderate demand and (iii) heavy demand would
be 0.5, 0.3 and 0.2 , respectively.

QUESTIONS:

What should be the choice of the marketing manager if his objective is to maximize
the expected returns?

What is the expected value of perfect information?

In the foregoing problem, suppose the marketing manager is inclined to undertake

research so that additional information would enable him to price the new product
under conditions of certainty. For this purpose, he wants to test-market the
product. He is able to assign probabilities of achieving different test-market results,
given that the product would ultimately have a particular level of demand. These
probabilities are given in the table 2.
TABLE
2:
Test Market

Light Demand S1

Moderate Demand S2

Heavy Demand S3

1. Unsuccessful

0.5

0.3

0.2

2. Moderately Successful

0.4

0.5

0.1

3. Highly successful

0.2

0.2

0.6

Conditional Probabilities of getting different test market results

given each state of nature

Questions

What is the expected value of the proposed research?

What is your advice to the marketing manager regarding the desirability or

otherwise of undertaking marketing research?

SOLUTION

States of Nature
Light Demand(S1)
Moderate demand(S2)
Heavy Demand(S3)
Courses of Action
Skimming Price(A1)
Intermediate Price(A2)
Penetration Price(A3)

Table showing Payoff

Courses of Action

States of Nature

Probabilit
y

Skimming
Price(A1)

Intermediate
Price(A2)

Penetration
Price(A3)

Light Demand(S1)

0.5

60

30

-30

Moderate
demand(S2)

0.3

30

60

Heavy Demand(S3)

0.2

-30

-15

45

Table showing Expected Payoff

States of Nature

Courses of Action

Probability

Skimming
Price(A1)

Intermediate
Price(A2)

Penetration
Price(A3)

Light Demand(S1)

0.5

30

15

-15

Moderate demand(S2)

0.3

18

Heavy Demand(S3)

0.2

-6

-3

33

30

-6

Expected Monetary Value (EMV)

Here we can observe that the first course of action i.e. A1 Skimming Price gives highest
EMV

Table showing Opportunity Loss

Courses of Action

States of Nature

Probabilit
y

Skimming
Price(A1)

Intermediate
Price(A2)

Penetration
Price(A3)

Light Demand(S1)

0.5

30

90

Moderate
demand(S2)

0.3

30

60

Heavy Demand(S3)

0.2

75

60

Table showing Expected Opportunity Loss

Courses of Action

States of Nature

Probabilit
y

Skimming
Price(A1)

Intermediate
Price(A2)

Penetration
Price(A3)

Light Demand(S1)

0.5

15

45

Moderate
demand(S2)

0.3

18

Heavy Demand(S3)

0.2

15

12

24

27

63

Expected Opportunity Loss

(EOL)

The first course of action also gives minimum EOL

Expected Payoff with Perfect Information

States of Nature

Probability

Max Payoff
for each
State of
Nature

Light Demand(S1)

0.5

60

30

Moderate
demand(S2)

0.3

60

18

Heavy Demand(S3)

0.2

45

EPPI

Expected Value of Perfect Information

EVPI = EPPI - EMV(max)

EVPI = 57 - 33 = 24 = EOL

57

Conditional Probabilities of Test Market

Results given each State of Nature

Conditional Probability P(A|Si)

Probability
Moderately
States of Nature P(Si)
Unsuccessful Successful
Light
Demand(S1)
0.5
0.5
Moderate
demand(S2)
Heavy
Demand(S3)

Highly
Successful
0.4

0.2

0.3

0.3

0.5

0.2

0.2

0.2

0.1

0.6

Calculation of Conditional Probabilities

of State of Nature given Test Market using Bayes
Theorem-

1. Unsuccessful Test Market

States of Nature

P(Si) x
Probability P(Si) P(Unsuccessful|Si) P(Unsuccessful|Si)

P(Si|Unsuccessful)

Light Demand(S1)

0.5

0.5

0.25

0.6578

Moderate
demand(S2)

0.3

0.3

0.09

0.2368

Heavy Demand(S3)

0.2

0.2

0.04

0.1052

Sum =

0.38

2. Moderately Successful Test Market

States of Nature

Probability
P(Si)

P(Moderately| P(Si) x P(Moderately|

Si)
Si)

P(Si|Moderately)

Light Demand(S1)

0.5

0.4

0.2

0.5405

Moderate
demand(S2)

0.3

0.5

0.15

0.4054

Heavy
Demand(S3)

0.2

0.1

0.02

0.054

Sum =

0.37

3. Highly Successful Test Market

States of Nature

Probability
P(Si)

P(Highly|Si)

P(Si) x P(Highly|Si)

P(Si|Highly)

Light Demand(S1)

0.5

0.2

0.1

0.3504

Moderate
demand(S2)

0.3

0.2

0.06

0.2142

Heavy
Demand(S3)

0.2

0.6

0.12

0.4258

Sum =

0.28

Unsuccessful Test Market

Table showing Payoff

States of Nature

Courses of Action

Probability

Skimming
Price(A1)

Intermediate
Price(A2)

Penetration
Price(A3)

Light Demand(S1)

0.6578

60

30

-30

Moderate
demand(S2)

0.2368

30

60

Heavy Demand(S3)

0.1052

-30

-15

45

Table showing Expected Payoff

States of Nature

Courses of Action

Probability

Skimming
Price(A1)

Intermediate
Price(A2)

Penetration
Price(A3)

Light Demand(S1)

0.6578

39.468

19.734

-19.734

Moderate
demand(S2)

0.2368

7.104

14.208

Heavy Demand(S3)

0.1052

-3.156

-1.578

4.734

43.416

32.364

-15

Expected Monetary Value (EMV)

Table showing Opportunity Loss

States of Nature

Courses of Action

Probability

Skimming
Price(A1)

Intermediate
Price(A2)

Penetration
Price(A3)

Light Demand(S1)

0.6578

30

90

Moderate
demand(S2)

0.2368

30

60

Heavy Demand(S3)

0.1052

75

60

Table showing Expected Opportunity Loss

States of Nature
Light Demand(S1)
Moderate
demand(S2)
Heavy Demand(S3)
Expected
Opportunity Loss
(EOL)

Skimming
Probability Price(A1)
0.6578
0.2368
0.1052

Courses of
Action

Intermediate Penetration
Price(A2)
Price(A3)
0
19.734
59.202

7.104
7.89

0
6.312

14.208
0

14.994

26.046

73.41

pected Payoff with Perfect Information

States of Nature
Light Demand(S1)
Moderate
demand(S2)
Heavy Demand(S3)
EPPI

Max Payoff for

each State of
Probability Nature

0.6578

0.2368
0.1052

60

39.6

60
45

14.4
4.5
58.41

Expected Value of Perfect Information

EVPI = EPPI - EMV(max)

EVPI = 58.41 - 43.416 =
14.994 = EOL

Moderately Successful Test Market

Table showing Payoff

States of Nature

Probabilit Skimming
y
Price(A1)

Courses of
Action

Intermediate Penetration
Price(A2)
Price(A3)

Light Demand(S1)

0.5405

60

30

-30

Moderate
demand(S2)

0.4054

30

60

0.054

-30

-15

45

Heavy Demand(S3)

Table showing Expected Payoff

States of Nature

Courses of Action

Probability

Skimming
Price(A1)

Intermediate
Price(A2)

Penetration
Price(A3)

Light Demand(S1)

0.5405

32.43

16.215

-16.215

Moderate demand(S2)

0.4054

12.162

24.324

0.054

-1.62

-0.81

2.43

42.972

39.729

-13.785

Heavy Demand(S3)
Expected Monetary Value
(EMV)

Table showing Opportunity Loss

States of Nature

Courses of Action

Probability

Skimming
Price(A1)

Intermediate
Price(A2)

Penetration
Price(A3)

Light Demand(S1)

0.5405

30

90

Moderate demand(S2)

0.4054

30

60

0.054

75

60

Heavy Demand(S3)

Table showing Expected Opportunity Loss

States of Nature
Light Demand(S1)
Moderate
demand(S2)
Heavy Demand(S3)
Expected
Opportunity Loss
(EOL)

Skimming
Probability Price(A1)
0.5405

Courses of
Action

Intermediate Penetration
Price(A2)
Price(A3)
0
16.215
48.645

0.4054

12.162

24.324

0.054

4.05

3.24

16.212

19.455

72.969

Expected Payoff with Perfect Information

States of Nature

Max Payoff for

each State of
Probability Nature

Light Demand(S1)
Moderate
demand(S2)

0.5405

60

32.4

0.4054

60

24

Heavy Demand(S3)

0.054

45

2.7

EPPI

Expected Value of Perfect Information

EVPI = EPPI - EMV(max)

EVPI = 59.18 - 42.972 =
16.212 = EOL

59.18

Highly Successful Test Market

Table showing Payoff

States of Nature

Probability

Skimming
Price(A1)

Courses of Action

Intermediate
Price(A2)

Penetration
Price(A3)

Light Demand(S1)

0.3504

60

30

-30

Moderate
demand(S2)

0.2142

30

60

Heavy Demand(S3)

0.4258

-30

-15

45

Table showing Expected Payoff

States of Nature

Courses of Action

Probability

Skimming
Price(A1)

Intermediate
Price(A2)

Penetration
Price(A3)

Light Demand(S1)

0.3504

21.024

10.512

-10.512

Moderate
demand(S2)

0.2142

6.426

12.852

Heavy Demand(S3)

0.4258

-12.774

-6.387

19.161

14.676

16.977

-8.649

Expected Monetary Value (EMV)

Table showing Opportunity Loss

States of Nature

Courses of Action

Probability

Skimming
Price(A1)

Intermediate
Price(A2)

Penetration
Price(A3)

Light Demand(S1)

0.3504

30

90

Moderate
demand(S2)

0.2142

30

60

Heavy Demand(S3)

0.4258

75

60

Table showing Expected Opportunity Loss

States of Nature

Skimming
Probability Price(A1)

Courses of Action

Intermediate
Price(A2)

Penetration
Price(A3)

Light Demand(S1)

0.3504

10.512

31.536

Moderate
demand(S2)

0.2142

6.426

12.852

Heavy Demand(S3)

0.4258

31.935

25.548

38.361

36.06

44.388

Expected Opportunity Loss

(EOL)

Expected Payoff with Perfect Information

States of Nature

Probability

Max Payoff for each State of

Nature

Light Demand(S1)

0.3504

60

21.024

Moderate demand(S2)

0.2142

60

12.852

Heavy Demand(S3)

0.4258

45

19.161

EPPI

Expected Value of Perfect Information

EVPI = EPPI - EMV(max)
EVPI = 53.037 - 16.977 = 36.06 = EOL

53.037

CONCLUSION

If no research is undertaken, we see that the expected value of profit is

Rs.33.

If a survey is conducted with three test markets we see that

For unsuccessful test market expected profit is Rs. 43.41.

For moderately successful market expected profit is Rs. 43.97

For highly successful market expected profit is Rs. 36.42.

Probability of different test markets

P (unsuccessful) = P (S1). P (unsuccessful/S1) + P
(S2). P (unsuccessful/S2) + P (S3) P (unsuccessful/s3)
= 0.5 x0.5 + 0.3x0.3 +0.2x0.2 = 0.38
P (moderately successful) = P (S1). P (moderately successful/S1)
+ P (S2). P (moderately successfully/S2) +P (S3) P (moderately
successful/s3)

= 0.5 x0.4 + 0.3x0.5 + 0.6 x 0.2 = 0.28

P (highly successful) = P (S1). P (highly successful/S1) + P (S2). P (highly

successful/S2) + P (S3) P (highly successful/s3)
= 0.5 x0.2 + 0.3x0.2 + 0.6 x 0.2 = 0.28
Combined profit after research = 0.38 x 43.41 + 0.37 x 42.87 + 0.28 x 17.17
=Rs. 37.19
Profit after research increases by Rs 37.19 - 33 = Rs 4.19
As profit increases by RS. 4.14 after research so, research should be undertaken.

THANK YOU