You are the vice president of a consumer electronics company that needs to determine whether or not to introduce a new product to the market. Either your company can manufacture it or you can subcontract the production to another firm. In either case, there is a 75% probability that your competition will market a similar product.

If your company manufactures the product, you are faced with the decision to price it high or low. If your competitor also enters the market, the firm will set its price high or low. The following table shows your payoffs, in millions of dollars, and corresponding probabilities.

Manufacturing Scenario:

Competitor’s Price Your Firm’s Price High Low High $3.7 (80%) -$4.6 (20%)

Low $2.2 (40%) $1.2 (60%)

If you do not have competition in the market after you manufacture the product, the payoff will be $6 million for setting the price high and $4.5 million for setting the price low.

If you decide to subcontract the product to another organization, the payoffs and corresponding probabilities are as follows:

Subcontracting Scenario:

Competitor’s Price Your Firm’s Price High Low High $2.7 (80%) -$3.3 (20%)

Low $1.6 (40%) $0.9 (60%)

If you do not have competition in the market after you subcontract the product, the payoff will be $5.2 million for setting the price high and $3.5 million for setting the price low.

Finally, if you decide not to manufacture or subcontract the product, you have the option of selling the design to another organization to manufacture and market.

The demand for the design will be either strong or weak.

Strong demand will result in a payoff of $2.5 million, whereas weak demand will result in a payoff of $0.8 million.

There is a 50/50 chance of the demand being either strong or weak.

Construct a decision tree to decide on a course of action for this new product.

AppendixLO1