Case Study

Should Research Be Undertaken?

(a) 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.
Table1
Alternatives
Light Demand ( S1)
Skimming Price A1
Intermediate Price A2

60
30

State of Nature
Moderate
Demand(S2)
30
60

Heavy Demand( S3)

-30
-15

Penetration Price A3
-30
0
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?
(b) 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
Conditional Probabilities of Getting Different Test Market Results Given Each State of
Nature
Test Market
Light Demand S1
Moderate Demand S2 Heavy Demand S3
1. Unsuccessful
0.5
0.3
0.2
2. Moderately
0.4
0.5
0.1
Successful
3. Highly successful
0.2
0.2
0.6
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?