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 State of NatureLight Demand ( S1) Moderate

Demand(S2)Heavy Demand( S3)

Skimming Price A1 60 30 -30Intermediate Price A2 30 60 -15

Penetration Price A3 -30 0 45Based 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.

QuestionsWhat 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 S31. Unsuccessful 0.5 0.3 0.22. Moderately Successful

0.4 0.5 0.1

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?