Soft selling occurs when a buyer is skeptical of the usefulness of a product and

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 $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 has less information about the efficacy of the accounting system than does the . At this price, the customer 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

Explanation / Answer

False.

Adverse selection "arises when one party to a transaction is better infirmed than the other". The problem with soft selling is that a buyer does not know if the seler is lying to them to get them to purchase the product. Information assymmetry occurs when the seller offers to discuss the product, as the buyer is not aware of how well the system actually works. However, this type of selling is a successful signal, as it lets the buyer know that they will not have to pay unless the product works. When a company reveals information about themselves to the buyer, they are indicating they offer a high-quality product or service.

Thus, the statement that this pricing scheme worsens the problem of information asymmetry in this scenario is false.

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