Question

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 $700. 1. According to the customer's beliefs, the expected value of the accounting system, or the expected reduction in cost, is $ 2. The information asymmetry stems from the fact that the (BUYER/ SALES REP) has more information about the efficacy of the accounting system than does the (BUYER/SALES REP). At this price, the customer (WILL/ WILL NOT) purchase the accounting system, since the expected value of the accounting system is (GREATER/ LESS) than the price. 3. 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/FALSE): This pricing scheme worsens the problem of information asymmetry in this scenario.

Answer 1

Soft selling occurs when a buyer is skeptical of the usefulness of a product and the seller offers a price based on realized value. The expected value of the accounting system in this scenario is $0.02, which is less than the price. The pricing scheme offered by the sales representative worsens the problem of information asymmetry.

Step-by-step explanation:

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. In this scenario, the customer believes there is a 10% chance of actually realizing a cost reduction of 20% and a 90% chance of no cost reduction. To calculate the expected value, we multiply the cost reduction by the probabilities and sum the results:

Expected value = (0.10 * 0.20) + (0.90 * 0) = 0.02

So, according to the customer's beliefs, the expected value of the accounting system is $0.02.

The information asymmetry stems from the fact that the Sales Representative has more information about the efficacy of the accounting system than does the buyer. At this price, the customer will not purchase the accounting system, since the expected value of the accounting system is less than the price.

The pricing scheme offered by the sales representative, where the customer pays 50% of the cost savings in exchange for the product, worsens the problem of information asymmetry. This is because the customer has to rely on the sales representative's assessment of the cost savings, and there is still uncertainty regarding the actual cost reduction.