5. 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 10%. However, the customer has heard this claim before and believes there is only a 50% chance of actually realizing that cost reduction and a 50% 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 $67.50.

The information asymmetry stems from the fact that the_________ (sales rep/buyer) has more 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 alleviates some of the information asymmetry that is present in this scenario.

True

False