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 Nature
Light Demand ( S1) Moderate Heavy Demand( S3)
Demand(S2)
Skimming Price A1 60 30 -30
Intermediate Price A2 30 60 -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?

(a) 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?
Solution to part (a):

PAY OFF MATRIX (As given):

State of Action
Demand Probability Skimming Price Intermediate Penetration Maximum Row
A1 Price A2 Price A3 Element
0.5 60 30 -30 60
Light Demand
(D1)
0.3 30 60 -15 60
Moderate
Demand(D2)
Heavy Demand 0.2 -30 0 45 45
(D3)

Now,
E(x) = Ʃ AiPi where A=Price; P=Probability

EXPECTED PAYOFF MATRIX:

State of Action
Demand Probability Skimming Price A1 Intermediate Price Penetration Price
A2 A3
0.5 30 15 -15
Light Demand
(D1)
0.3 9 18 0
Moderate
Demand(D2)
Heavy Demand 0.2 -6 -3 9
(D3)

Expected 33 30 -6
Monetary Value

As we can observe, EMV (Expected Monetary Value) = 33 (maximum column element)

EMV = Summation of all column elements under States of Action.

Now, constructing the Opportunity Loss Table:

For finding Opportunity Loss, for a particular row, we find the Maximum Profit and subtract
it from all the column elements of that respective row.

OPPURTUNITY LOSS MATRIX:

State of Action
Demand Probability Skimming Price A1 Intermediate Penetration
Price A2 Price A3
0.5 0 30 90
Light Demand
(D1)
0.3 30 0 60
Moderate
Demand(D2)
Heavy Demand 0.2 75 60 0
(D3)

Now,
E(x) = Ʃ AiPi Where A=Price; P =

Probability

EXPECTED OPPURTUNITY LOSS MATRIX:

State of Action
Demand Probability Skimming Price A1 Intermediate Penetration
Price A2 Price A3
0.5 0 15 45
Light Demand
(D1)
0.3 9 0 18
Moderate
Demand(D2)
Heavy Demand 0.2 15 12 0
(D3)

EOL 24 27 63

EOL (Expected Opportunity Loss) = 24 (Minimum Value Element)

Both EOL and EMV decision criteria unanimously correspond to the fact that Skimming
Price(A1) will be the best option to follow in order to maximize the Expected Returns.
Hence,

Expected Value of Perfect Information (EVPI) = Expected Pay-Off of Perfect Information

(EPPI) – Expected Monetary Value (EMV)

Now,
Expected Pay Off of Perfect Information is calculated as the summation of all the
multiplication product of the maximum row element and its corresponding Prior Probability.

Therefore,
EPPI = 60x0.5 + 60x0.3 + 45x0.2
= 30+18+9 = 57
Therefore,
EVPI = 57 -33 = 24
Therefore,
Expected Value of Perfect Information.

SOLUTION TO PART(B):

Lets assume,

E: Event that the product was unsuccessful.

E’: Event that the product was moderately successful.
E”: Event that the product was highly successful.
L: Event that the demand was light.
M: Event that the demand was moderate.
N: Event that the demand was high.

Given Table:

Test market
Demand Unsuccessful Moderately Successful Highly Successful
0.5 0.4 0.2
Light Demand
(D1)
0.3 0.5 0.2
Moderate Demand(D2)
Heavy Demand 0.2 0.1 0.6
(D3)

As demand probability is not the prior probability, but it’s the posterior probability.
Let P(A/B) be defined as probability of event A occurring, when the event B has already
occurred.
Thus, we have,
P(E/L) = 0.5
P(E’/L) = 0.4
P(E”/L) = 0.2
P(E/M) = 0.3
P(E’/M) = 0.5
P(E”/M) = 0.2
P(E/H) = 0.2
P(E’/H) = 0.1
P(E”/H) = 0.6

P(L/E) = ( P(E/L). P(L) ) / { ( P(E/L).P(L) ) + ( P(E/M).P(M) ) + ( P(E/H).P(H) ) }

= ( 0.5 x 0.5 ) / { (0.5 x 0.5) + (0.3 x 0.3) + (0.2 x 0.2) } = 25/38

Similarly,
P(M/E) = 9/38

P(H/E) = 4/38

P(L/E’) = ( P(E’/L). P(L) ) / { ( P(E’/L).P(L) ) + ( P(E’/M).P(M) ) + ( P(E’/H).P(H) ) }

= 20/37

Similarly,
P(M/E’) = 15/37

P(H/E’) = 2/37

P(L/E”) = ( P(E”/L). P(L) ) / { ( P(E”/L).P(L) ) + ( P(E”/M).P(M) ) + ( P(E”/H).P(H) ) }

= 10/28

Similarly,
P(M/E”) = 6/28

P(H/E”) = 12/28

MAKING PAY OFF MATRIX FOR UNSUCCESSFUL MARKET(PESSEMISTIC VIEW):

PAY OFF MATRIX:

Test market
Demand Probability A1 A2 A3 Maximum
element
25/38 60 30 -30 60
Light Demand
(L)
9/38 30 60 0 60
Moderate
Demand(M)
Heavy Demand 4/38 -30 -15 45 45
(H)

Now,
E(x) = Ʃ AiPi where A= Price; P= Probability

EXPECTED PAY OFF MATRIX:

Test Market
Demand Probability A1 A2 A3
25/38 39.46 19.73 - 19.73
Light Demand
(L)
9/38 7.104 14.2 0
Moderate
Demand(M)
Heavy Demand 4/38 - 3.156 -1.578 4.73
(H)

EMV 43.408 32.352 -15.0

EMV (Expected Monetary Value) = 43.408 (Maximum column element)

EMV = Summation of all column elements under States of Action.

Now, forming the Opportunity Loss Table:

For finding Opportunity Loss, for a particular row, we find the Maximum Profit and subtract
it from all the column elements of that respective row.

Test Market
Demand Probability A1 A2 A3
25/38 0 30 90
Light Demand
(L)
9/38 30 0 60
Moderate
Demand(M)
Heavy Demand 4/38 75 60 0
(H)
Now,
E(x) = Ʃ AiPi where A=Price ; P= Probability

OPPURTUNITY LOSS MATRIX:

Test Market
Demand Probability A1 A2 A3
25/38 0 19.730 59.20
Light Demand
(L)
Moderate 9/38 7.104 0 14.2
Demand(M)
Heavy Demand 4/38 7.89 6.311 0
(H)

EOL 14.994 26.041 73.40

EOL (Expected Opportunity Loss) = 14.994 (Minimum Value Element)

Both EOL and EMV decision criteria unanimously correspond to the fact that Skimming
Price(A1) will be the best option to follow in order to maximize the Expected Returns in
Unsuccessful Market.

Hence,
Expected Value of Perfect Information (EVPI) = Expected Pay-Off of Perfect Information
(EPPI) – Expected Monetary Value (EMV)

Now,
Expected Pay Off of Perfect Information is calculated as the summation of all the
multiplication product of the maximum row element and its corresponding Prior Probability.

Therefore,
EPPI = 60x25/38 + 60x9/38 + 45x4/38
= 39.46 + 14.2 + 4.73 = 58.41
Therefore,
EVPI = 58.41 – 43.408 = 15.002

MAKING PAY OFF TABLE FOR MODERATELY SUCCESSFUL MARKET(NORMAL MARKET):

PAY OFF MATRIX:

Test market
Demand Probability A1 A2 A3 Maximum
 element
20/37 60 30 -30 60
Light Demand
(L)
15/37 30 60 0 60
Moderate
Demand(M)
Heavy Demand 2/37 -30 -15 45 45
(H)

Now,
E(x) = Ʃ AiPi where A=Price ; P= Probability

EXPECTED PAY OFF MATRIX:

Test Market
Demand Probability A1 A2 A3
20/37 32.43 16.21 - 16.21
Light Demand
(L)
15/37 12.16 24.32 0
Moderate
Demand(M)
Heavy Demand 2/37 - 1.62 -0.81 2.43
(H)

EMV 42.99 39.72 -13.97

EMV (Expected Monetary Value) = 42.99 (maximum column element)

EMV = Summation of all column elements under States of Action.

Now, forming the Opportunity Loss Table:

For finding Opportunity Loss, for a particular row, we find the Maximum Profit and subtract
it from all the column elements of that respective row.

OPPURTUNINTY LOSS MATRIX:

Test Market
Demand Probability A1 A2 A3
Light Demand 20/37 0 30 90
(L)
Moderate 15/37 30 0 60
Demand(M)
Heavy Demand 2/37 75 60 0
(H)
 Now,
E(x) = Ʃ AiPi where A=Price; P= Probability

EXPECTED OPPURTUNITY LOSS MATRIX:

Test Market
Demand Probability A1 A2 A3
20/37 0 16.21 48.63
Light Demand
(L)
Moderate 15/37 12.16 0 24.32
Demand(M)
Heavy Demand (H) 2/37 4.05 - 3.24 0

EOL 16.21 19.45 72.95

EOL (Expected Opportunity Loss) = 16.21(Minimum Value Element)

Both EOL and EMV decision criteria unanimously correspond to the fact that Skimming
Price(A1) will be the best option to follow in order to maximize the Expected Returns in
Moderately Successful Market.
Hence,
Expected Value of Perfect Information (EVPI) = Expected Pay-Off of Perfect Information
(EPPI) – Expected Monetary Value (EMV)
Now,
Expected Pay Off of Perfect Information is calculated as the summation of all the
multiplication product of the maximum row element and its corresponding Prior Probability.

Therefore,
EPPI = 60x20/37 + 60x15/37 + 45x2/37
= 32.43 + 24.32 + 2.43 = 59.18
Therefore,
EVPI = 59.18 – 42.99 = 16.21

MAKING PAY OFF TABLE FOR HIGHLY SUCCESSFUL MARKET(OPTIMISTIC VIEW):

PAY OFF MATRIX:

Test market
Demand Probability A1 A2 A3 Maximum
element
10/28 60 30 -30 60
Light Demand
(L)
6/28 30 60 0 60
Moderate
Demand(M)
Heavy Demand 12/28 -30 -15 45 45
(H)

Now,
E(x) = Ʃ AiPi where A=Price; P= Probability

EXPECTED PAY OFF MATRIX:

Test Market
Demand Probability A1 A2 A3
10/28 21.42 10.21 - 10.21
Light Demand
(L)
6/28 6.426 12.852 0
Moderate
Demand(M)
Heavy Demand 12/28 - 12.858 -6.427 19.28
(H)

EMV 14.991 16.63 9.07

EMV (Expected Monetary Value) = 16.63 (maximum column element)

EMV = Summation of all column elements under States of Action.

Now, forming the Opportunity Loss Table:

For finding Opportunity Loss, for a particular row, we find the Maximum Profit and subtract
it from all the column elements of that respective row.

OPPURTUNITY LOSS TABLE :

Test Market
Demand
Probability A1 A2 A3
Light Demand 10/28 0 30 90
(L)
Moderate 6/28 30 0 60
Demand(M)

Heavy Demand 12/28 75 60 0

(H)
Now,
E(x) = Ʃ AiPi where A=Price; P= Probability

EXPECTED OPPURTUNITY LOSS TABLE:

Test Market
Demand Probability A1 A2 A3
10/28 0 10.71 32.14
Light Demand
(L)
Moderate 6/28 6.428 0 12.85
Demand(M)
Heavy Demand 12/28 32.1475 25.714 0
(H)

EOL 38.5755 36.42 44.992

EOL (Expected Opportunity Loss) = 36.42 (Minimum Value Element)

Both EOL and EMV decision criteria unanimously correspond to the fact that intermediate
pricing policy will be the best option to follow in order to maximize the Expected Returns in
Highly Successful Market.
Hence,
Expected Value of Perfect Information (EVPI) = Expected Pay-Off of Perfect Information
(EPPI) – Expected Monetary Value (EMV)

Now,
Expected Pay Off of Perfect Information is calculated as the summation of all the
multiplication product of the maximum row element and its corresponding Prior Probability.

Therefore,
EPPI = 60x10/28 + 60x6/28 + 45x12/28
= 21.428 + 12.857 + 19.2857 = 53.5707
Therefore,

EVPI = 53.5707 – 16.63 = 36.93

Thus, we can say that it is profitable to employ Skimming Price for Unsuccessful and
Moderately Successful Market. But for Highly Successful Market we employ Intermediate
Pricing Policy.
 CONCLUSIONS

As prior probability express uncertainty about an event before some evidence is taken into
account and posterior probability is based on evidence that is obtained from an already
finished experiment or survey, results based on posterior probability are better.
The difference between prior and posterior probability characterizes the information we
have got from the experiment ,in this problem the EOL ,EMV and EPPI values changed from
24,33,57(prior) to 58.41 , 43.408 and 15.002 in case of unsuccessful market,59.18 , 42.99
,16.21 in case of moderately successful market and 53.5707 ,16.63 ,36.93 in case of highly
successful market which clearly signifies the increase in accuracy of the results that are
obtained
Wide variation in the case of highly successful market enables the marketing manager to
change the strategy, while dealing that particular case.
Hence results obtained through posterior probabilities are better than that obtained
through prior probabilities.

LIMITATIONS OF CASE STUDY

1) There is an uncertainity in demand as probability values are quite fluctuating .final results
may vary with change in demand values
2) Different possibilities of results in different cases based on probability values of
unsuccessful ,highly successful and moderately successful markets show high variation of
results(output) on demand (input)
3) Robustness of the results is quite low as the results vary widely with change in input
values .

Scope of case study

Case study research excels at bringing us to an understanding of a complex issue

or object and can extend experience or add strength to what is already known
through previous research. Case studies emphasize detailed contextual analysis of
a limited number of events or conditions and their relationships. Researchers
have used the case study research method for many years across a variety of
disciplines. Social scientists, in particular, have made wide use of this qualitative
research method to examine contemporary real-life situations and provide the
basis for the application of ideas and extension of methods.
 Researchers from many disciplines use the case study method to build upon
theory, to produce new theory, to dispute or challenge theory, to explain a
situation, to provide a basis to apply solutions to situations, to explore, or to
describe an object or phenomenon. The advantages of the case study method are
its applicability to real-life, contemporary, human situations and its public
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common readers everyday experience and facilitate an understanding of complex
real-life situations.