Rival Response Instructions: Enter your responses as a whole number. Indicate a

Question

                                         Rival Response

Instructions: Enter your responses as a whole number. Indicate a negative response with a (-) negative sign.

(a) If the probability of rivals matching a price reduction is 94 percent, what is the expected payoff to a price cut?

$

(b) If the probability of rivals reducing price even though you don’t is 7 percent, what is the expected payoff to notreducing price?

$

                                         Rival Response

Your Company's Action   Reduce Price   Don’t Reduce Price    Reduce Price   Loss = $800   Gain = $50,000    Don’t Reduce Price   Loss = $6,000   No Loss or Gain Expected payoff Probability of Size of loss from Probability of rivals Gain from lone rivals matching price cuts not matching price cut

Explanation / Answer

Your company has reduced the price and the probability of rivals matching that is given by 94%. (1st row is considered when your company has reduced the price)

Expected payoff = (-800 * 0.94) + (50000 * 0.06) = $2248

probability of rivals reducing price even though you don’t is 7 percent (2nt row is considered when your company has not reduced the price)

Expected payoff = (-6000 * 0.07) + (0 * 0.93) = -$420

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