5 (2) Individual Problems 19-5

Soft selling occurs when a buyer is skeptical of the usefulness of a product and the seller offers to set a price that depends on realized value. For example, suppose a sales representative is trying to sell a company a new accounting system that will, with certainty, reduce costs by 20%. However, the customer has heard this claim before and believes there is only a 10% chance of actually realizing that cost reduction and a 90% chance of realizing no cost reduction.

Assume the customer has an initial total cost of $900.

According to the customer's beliefs, the expected value of the accounting system, or the expected reduction in cost, is____________________.

Suppose the sales representative initially offers the accounting system to the customer for a price of $99.00.

The information asymmetry stems from the fact that the________ (SALES REP. / BUYER) has less information about the efficacy of the accounting system than does the_______ (SALES REP./ BUYER) . At this price, the customer________________ (WILL / WILL NOT) purchase the accounting system, since the expected value of the accounting system is than the price.

Instead of naming a price, suppose the sales representative offers to give the customer the product in exchange for 50% of the cost savings. If there is no reduction in cost for the customer, then the customer does not have to pay.

True or False: This pricing scheme worsens the problem of information asymmetry in this scenario.

True

False