XY has developed two new products, Product X and Product Y, but has insufficient resources to launch both products. The success of the products will depend on the extent of competitor reaction. There is a 20 percent chance that competitors will take no action, a 50 percent chance that they will launch a similar product and a 30 percent chance that they will launch a better product.
The profit/loss that will be earned by each of the products depending on the extent of competitor reaction is as follows:
Competitor reaction Product X Product Y
No action $540 000 $620 000
Launch a similar product $320 000 $380 000
Launch a better product ($150 000) ($200 000
Another option for XY would be to launch neither product. If it chooses this course of action there is a 60 percent chance that competitors will take no action and there will be no effect on the company’s profit. There is a 40 percent chance that competitors will launch a new product and company profits will reduce by $100 000.
Required:
Demonstrate, using a decision tree and based on expected value, the best course of action for the company.