Bayesian Decision Theory

In Pricing Strategy
PAUL E. GREEN

Both this article and fhe

preceding one by Harry V.
Roberts on "Bayesian Statistics in Marketing" (pp. 1-4)
show that Bayesian statistics is a new and potentially
powerful tool for systematically working with management judgments.
The present article by
Pdul E, Green shows how this
approach can be used in the
area of pricing analysis.

the publication of Robert Schlaifer's pioneering work,

S INCE
Probability and Statistics for Business Decisions,^ the Bayesian approach to decision making under uncertainty has received
much comment, pro and con, by theoretical and applied statisticians
alike.
However, in contrast to the large number of theoretical contributions being made to decision theory in general and Bayesian
statistics in particular, reported applications of these procedures
to real-world problem situations have been rither meager. Applications appear especially lacking in the marketing field.
In highly oversimplified terms, the Bayesian approach to decision making under uncertainty provides a framework for explicitly
working with the economic costs of alternative courses of action,
the prior knowledge or judgments of the decision maker,*and formal
modification of these judgments as additional data are introduced
into the problem.
In the Du Pont Company, the decision theory approach, often
augmented by computer simulation, has been used experimentally
over the past few years in a variety of market planning applications, ranging from capacity expansion problems to questions concerning the introduction of new products and long-range price and
promotional strategy. The application to follow concerns the use
of Bayesian decision theory in the selection of a "best" pricing
policy for a firm in an oligopolistic industry where such factors
as demand elasticity, competitive retaliation, threat of future price
weakness, and potential entry of new competitors influence the
effectiveness of the firm's courses of action. Although the content
of this case is aprocryphal, its structure has been compounded
from actual situations.
No attempt will be made to describe even superficially all of the
many facets of the Bayesian approach to decision making under
uncertainty. The content of this article is focused on only two
main considerations.
First, in dealing with actual marketing situations, for example,
pricing problems, the opportunity to obtain field information may
be nonexistent. Second, in dealing with actual marketing problems, the complexity of the situation may force the analyst to
develop a problem structure in much greater detail than has been
described in the literature.
Robert Schlaifer, Probability and Statistics for Business Decisions
{New York; McGraw-Hill Book Co., Inc., 1959) In addition, two
excellent general articles dealing with the Bayesian approach are:
Harry V. Roberts, "The New Business Statistics," Journal of Bustness, Vol. 33 (January, 1960) pp. 21-30, and Jack Hlrshleifer, "The
Bayesian Approach to Statistical DecisionAn Exposition," Journal
of Business, Vol. 34 (October, 1961) pp. 471-489.

Journal of Marketing, January, 1963

An Illustrative Application
Since early 1955, the Everclear Plastics Company had been producing a resin called Kromel,
basically designed for certain industrial markets.
In addition to Everclear, three other firms were
producing Kromel resin. Prices among all four suppliers (called here the Kromel industry) were identical; and product quality and service among producers were comparable. Everclear's current share
of Kromel industry sales amounted to 40%.
Four industrial end uses comprised the principal
marketing area for the Kromel industry. These
market segments will be labeled A, B, C, and D.
Three of the four segments (B, C, and D) were
functionally dependent on segment A in the sense
that Kromel's ultimate market position and rate of
approach to this level in each of these three segments was predicated on the resin's making substantial inroads in segment A.
The Kromel industry's only competition in these
four segments consisted of another resin called
Verlon, which was p]duced by six other firms.
Shares of the total Verlon-Kromel market (weighted
sums over all four segments) currently stood at
70% Verlon industry, and 30% Kromel industry.
Since its introduction in 1955, the superior functional characteristics per dollar cost of Kromel had
enabled this newer product to displace fairly large
poundages of Verlon in market segments B C
and D.
On the other hand, the functional superiority
per dollar cost of Kromel had not been sufiiciently
high to interest segment A consumers. While past
price decreases in Kromel had been made, the
cumulative effect of these reductions had still been
insuflicient to accomplish Kromel sales penetration
in segment A. (Sales penetration is defined as a
market share exceeding zero).
In the early fall of 1960, it appeared to Everclear's management that future weakness in Kromel
price might be in the offing. The anticipated capacity increases on the part of the firm's Kromel competitors suggested that in the next year or two
potential industry supply of this resin might significantly exceed demand, if no substantial market
participation for the Kromel industry were established in segment A. In addition, it appeared likely
that potential Kromel competitors might enter the
business, thus adding to the threat of oversupply
in later years.
Segment A, of course, constituted the key factor.
If substantial inroads could be made in this segment, it appeared likely that Kromel industry sales
growth in the other segments not only could be
speeded up, but that ultimate market share levels
for this resin could be markedly increased from
those anticipated in the absence of segment A
penetration. To Everclear's sales management, a
price reduction in Kromel still appeared to repre-

sent a feasible means to achieve this objective,

and (even assuming similar price reductions on the
part of Kromel competitors) perhaps could still be
profitable to Everclear.
However, a large degree of uncertainty surrounded both the overall attractiveness of this alternative, and under this alternative the amount
of the price reduction which would enable Kromel
to penetrate market segment A.
Problem Structuring and Development of
the Model
Formulation of the problem required a certain
amount of artistry and compromise toward achieving a reasonably adequate description of the problem. But it was also necessary to keep the structure simple enough so that the nature of each
input would be comprehensible to the personnel
responsible for supplying data for the study.
Problem components had to be formulated, such
as: (a) length of planning period; (b) number
and nature of courses of action; (c) payoff functions; and (d) states of nature covering future
growth of the total Verlon-Kromel market, interindustry (Kromel vs. Verlon) and intra-Kromel
industry effects of a Kromel price change, implications on Everclear's share of the total Kromel
industry, and Everclear's production costs.
Initial discussions with sales management indicated that a planning period of five years should
be considered in the study. While the selection of
five years was somewhat arbitrary, sales personnel
believed that some repercussions of a current price
reduction might well extend over several years
into the future.
A search for possible courses of action indicated
that four pricing alternatives covered the range of
actions under consideration:
1. Maintenance of status quo on Kromel price,
which was $1.00/lb.
2. A price reduction to $.93/lb. within the next
three months.
3. A price reduction to $.85/lb. within the next
three months.
4. A price reduction to $.80/lb. within the next
three months.
ABOUT THE AUTHOR. Since [olning
the firm in 1958, Paul E. Green has been
engaged in market pliinning and marketing research activities with the Textile
Fibers Department of the DuPont Company. Dr. Green is also a member of
the instructional staff of the Marketing
Department of the University of Pennsylvania's Wharfon School.
From 1953 to 1958. he was supervisor
of operations research at Lukens Steel
Company and statistics Instructor at the University of Pennsylvania, where he had received both his M.A. and Ph.D. in
statistics.

Bayesian Decision Theory In Pricing Strategy

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.93

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50%

25%

100%

75%

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Inasmuch as each price action would be expected

to produce a different time pattern in tbe fiow
of revenues and costs, and since no added invest-

ment in production facilities was contemplated, it

was agreed that cumulative, compounded net profits
over the 5-year planning period would constitute a

Journal of Marketing, January, 1963

TABLE 1
SUBJECTIVE PROBABIUTIKS AND DATA ESTIMATES ASSOCIATED
WITH EVERCLEAR'S PRICING PROBLEM

-^^^=-=
1. If Kromel price remained at $1.00/pound and market segment A were not penetrated, what market share pattern for Kromel industry sales pounds would obtain
in segments B, C, and D?
Base AssumptionKromel Industry Share
Segment B
Segment C
Segment D
1961
57.0%
40.0% ~
42.0%
1962
65.0
50.0
44.0
1963
75.0
80.0
46.0
1964
76.0
84.0
48.0
1965
76.0
84.0
50^
2. If Kromel price remained at $1.00/pound, what is the probability that Kromel
would still penetrate market segment A?
Probability of PenetrationSegment A
1961
-05
1962
-10
1963
-20
1964
-25
1965
-40
3. Under price strategies $.93/pound, $.85/pound, and $.80/pound, w h a t is the probability of Verlon industry price retaliation; and given the particular Retaliation
(shown below), w h a t is the probability t h a t Kromel would still penetrate m a r k e t
Pricing
Verlon Industry

Case (entries

Retaliation

are probabilities)
$.9S Case

$.85 Case

$.80 Case

Full match of Kromel price reduction

.05
-15
Half match of Kromel price reduction
.60
.75
Stand pat on price
-35
-10
Given a Particular Verlon Retaliatory
Action,
the Probability that Kromel Would Still Penetrate Segment
Full
Match

S9S Case
' Half
Stand
Match
Pat

Full
Match

$-85 Case
Half
Stand
Match
Pat

Full
Match

.38
-60
'^2
A

$-80 Case
Half
Stand
Match
Pat
.90
.80
.95
.85

.75
.80
.40
.20
.35
.20
1961
.15
.80
.90
.60
.30
.60
.30
.25
1962
.85
.90
1.00
.95
.65
.40
.65
.40
.35
1963
.90
.95
1.00
.98
.75
.70
.75
.65
.60
1964
.95
.98
1.00
.98
.80
1965
.65
.80
.75
.8
.70
4. If penetration in m a r k e t segment A were effected, w h a t is the probability t h a t
Kromel would obtain the specific share of this segment ( a ) d u r m g the first year of
penetration, and (b) during the second year of participation?
Share
First year
Second year
.00
.15
25%
.00
.35
50
.00
.40
75
1.00
.10
100
5 If Kromel penetration of m a r k e t segment A were effected, w h a t impact would this
event have on speeding up Kromel industry participation m segments B, C, and Lt.
Segment B"Would speed up m a r k e t participation one year from base assumption
shown under point 1 of this Table.
Segment CWould speed up m a r k e t participation one year from base assumption
shown under point 1 of this Table.
_ ,
,
Segment DKromel would move up to 8 5 % of the m a r k e t m the following year,
and would obtain 100% of the m a r k e t m the second year following
penetration of segment A.
.

, ^
4. A
6. Under the price reduction strategies, if Kromel penetration of m a r k e t segnaent A
were not accomplished, w h a t ia the probability t h a t Kromel industry participation
in segments B, C, and D (considered as a group) would still be speeded up one
year from the hase assumption shown u n d e r point 1 of this Table?
Probability of Speedup
$.93 Case

.45

$.85 Case
$.80 Case

.60
.80

Bayesian Decision Theory In Pricing Strategy

l^

take the specific

// Kromel price
@ ?1.00/pound

A ction

Probability

Sl.OO/pound
.93
.85
.80
.93
.85
.80
.85
.80
.80

@ $.93/pound
@ $.85/pound
@ $.80/pound

Ii
.80
.05
.00
.80
.20
.00
hOO

.00
1.00

capacity changes were assumed in 1965.)

Competitor
$1.00/pound
$.93/pound
R
S
T
U
V

.50
.90
.40
.70
.70

$.85/pound

.75
.10
.50
.50

$.80/pound

.50
.05
.25
.25
Timing and amount available beginning of year
Competitor
1963
R
10 million pounds
20 million pounds
S
12
20
T
12
20
U
6
12
V
6

.00
.20
.00
.00
.00

relevant payoff function. In the absence of any

unanimity as to the "correct" opportunity cost of
capital, it was decided to use two interest rates of
6 and 10% annually in order to test the sensitivity of outcomes to the cost of capital variable.
Another consideration came to light during initial problem discussions. Total market growth (for
the Kromel or Verlon Industry) over the next
five years in each market segment constituted a
"state of nature" which could impinge on the
Everclear's profit position. Accordingly, it was
agreed to consider three separate forecasts of
total market growth, a "most probable, optimistic,
and pessimistic" forecast.
From these assumptions a base case was then
formulated. This main case would first consider the
pricing problem under the most probable forecast
of total Verlon-Kromel year-by-year sales potential in each segment, using an opportunity cost of
capital of 6% annually. The two other total market
forecasts and the other cost of capital were then
to be treated as sub-cases, in order to test the
sensitivity of the base case outcomes to variations
in these particular states of nature.
However, inter- and intra-industry alternative
states of nature literally abounded in the Kromel
resin problem. Sales management at Everclear had
to consider such factors as:

1. The possibility that Kromel resin could effect

penetration of market segment A if no price
decrease were made.
2. If a price decrease were made, the extent of
Verlon retaliation to be anticipated.
3. Given a particular type of Verlon price retaliation, its possible impact on Kromel's
penetration of segment A.
4. If segment A were penetrated, the possible
market share which the Kromel industry
could gain in segment A.
5. If segment A were penetrated, the possible
side effects of this event on speeding up
Kromel's participation in market segments
B, C, and D.
6. If segment A were not penetrated, the impact
which the price reduction could still have on
speeding up Kromel's participation in segments B, C, and D.
7. If segment A were not penetrated, the possibility that existing Kromel competitors
would initiate price reductions a year hence.
8. The possible impact of a current Kromel
price reduction on the decisions of existing
or potential Kromel producers to increase capacity or enter the industry.
While courses of action, length of planning period, and the payoff measure (cumulative, com-

Journal of Marketing, January, 1963

10
Probability
1.00

1961

1962

1963

YEAR END
(Coded data)
FIGURE 2. Cumulative probability of Kromel's penetration of market
segment A (as a function of time and initial price).

pounded net profits) for the base case had been

fairly quickly agreed upon, the large number of
inter- and intra-Kromel industry states of nature
deemed relevant to the problem would require
rather lengthy discussion with Everclear's sales
personnel.
Accordingly, introductory sessions were held
with Everclear's sales management, in order to
develop a set of states of nature large enough to
represent an adequate description of the real problem, yet small enough to be comprehended by the
participating sales personnel. Next, separate interview sessions were held with two groups of
Everclear's sales personnel; subjective probabilities
regarding the occurrence of alternative states of
nature under each course of action were developed
in these sessions. A final session was held with all
contributing personnel in attendance; each projection and/or subjective probability was gone over
in detail, and final set of ground rules for the
study was agreed upon. A description of these
ground rules appears in Table 1.
Use of Tree Diagrams
The large number of alternative states of nature
which were associated with inter- and lntra-

industry factors necessitated the construction of

"tree diagrams" for each pricing, alternative. These
diagrams enabled sales management to trace the
implications of their assumptions. Figure 1 shows
a portion of one such tree diagram.
A word of explanation concerning interpretation
of the probability tree is in order. The two principal
branches underneath the $1MO case refer to the
event of whether or not Kromel penetrates segment A in the first year of the planning period.
Sales personnel felt that a 5% chance existed for
penetration, hence the figure .05000 under A.
However, if A were penetrated, four market
participations were deemed possible: 25, 50, 75
and 100% carrying the conditional probabilities
of .15, .35, .40 and .10 respectively.
Multiplication of each conditional probability, in
turn by the .05 marginal probability leads to the
four joint probabilities noted in the upper left portion of the chart.
Next, if Kromel did not penetrate segment A
during the first year, a probability of .80 was attached to the event that competitive Kromel producers would reduce price to $.93/lb. Multiplying
the conditional probability of .80 by .95 results m

Bayesian Decision Theory In Pricing Strategy

Millions of
Sales Dollars
15 r

? .80

CASE

\$'.85

CASE

5 .93

CASE

10 -

'
5

/ /

REFERENCE BASE

SI.00

CASE

1961

1962

1963

1964

1965

YEAR END
(Coded data)
FIGURE 3. Kromel sales volumeEverclear Plastics Co. (incremental
sales dollars generated over ?1.00 case).
the .76000 probability assigned to the joint event,
"did not penetrate segment A and Kromel price was
reduced to $.93/lb."
However, if Kromel price were reduced to $.93/lb.,
Verlon retaliation had to be considered, leading to
the joint probabilities assigned to the next set of
tree branches. In this way probabilities were built
up for each of the over-400 possible outcomes of the
study by appropriate application of the ground rules
noted in Table 1.
A mathematical model was next constructed for
determining the expected value of Everclear's cumulative, compounded net profits under each price
strategy. See Table 2.
This model was then programed for an electronic
computer. The simulation was first carried out for
the base case assumptions regarding total VerlonKromel market growth and cost of capital. Additional runs were made in which these assumptions
were varied.
Results of the Computer Simulations
The computer run for the base case showed some
interesting results for the relevant variables affecting Everclear's cumulative, compounded net profits

position at the end of the planning period. These

results are portrayed in Figures 2 through 4.
Figure 2 summarizes the cumulative probability
of Kromel's penetration of market segment A (the
critical factor in the study) as a function of time,
under each pricing strategy. As would be expected,
the lowest price strategy, the $.80 case, carried the
highest probability of market penetration. However, the cumulative probability approached 1, that
all price strategies would eventually effect penetration of market segment A by the end of the
simulation period. This behavior stems from the
impact of price decreases assumed to be initiated
by Kromel competitors (if penetration were not
initially effected under the original price strategies) which in turn changed the probability of
Kromel's penetration of segment A in later years,
since this probability was related to price.
Figure 3 shows the expected incremental sales
dollars (obtained by subtracting the expected outcomes of the $1.00 case, used as a reference base,
from the expected outcomes of each of the other
three cases respectively) generated for Everclear
under each price strategy. While some tapering
off in average sales dollars generated from the

Journal of Marketing, January, 1963

12
KROMEL MODEI

TABLE 2
-EXPECTED VALUE OP CUMULATIVE, COMPOUNDED NET PROFITS

The mathematical model used to determine the expected values of Everclear's cumulative, compounded net profits was as follows:
n
m
,
,
CCN (Xk) = ^ P, 2 [(1 + r ) - ' T \ (Dn - Zu) (Ki,Mn) 1- ]
i= 1
i=:l
Zn = 0 (K,jMu)
CCN (Xk) ^ Expected value of Everclear's cumulative, compounded
4)
tp fit
d
hX
i
t t
(k
1
net profits under each Xk price strategy (k == 1, . .
n).
PJ = Probability assigned to the j th outcome (j 1, 2, . . . ,
r = Interest rate per annum, expressed decimally.
T = Ratio of net to gross profits of Everclear's Kromel
operation (assumed constant in the study),
m)
i] = Kromel price in $/pound in the i th year (i =: 1, 2, . . . ,
for the j th outcome,
i] Cost in $/pound of Everclear's Kromel resin in the i th
year for the j th outcome. (This cost is a function of the
amount of Kromel pounds sold by Everclear.)
0 Function of.
.j = Everclear's over-all market share of Kromel Industry
sales (in pounds) in the i th year for the j th outcome
(expressed decimally).
ij = Kromel Industry poundage (summed over all four market
segments) in the i th year for the j th outcome.

price reduction cases compared to the $1.00 case can

be noted near the end of the simulation period,
this tapering off is less pronounced than that which
would be experienced by the total Kromel industry.
The reason for this different pattern is that the
price reduction strategies (by reducing the probability of future capacity expansion on the part
of existing and potential Kromel competitors) led
to gains in Everclear's market share, relative to
market share under the $1.00 case. These increases
in Everclear's market share, under the price reduction strategies, partially offset the decline in
incremental sales dollar gains (experienced by the
Kromel industry near the end of the period) and
thus explain the difference in sales patterns that
would be observed between Everclear and the
Kromel industry.
Figure 4 summarizes the behavior of Everclear's
average, year-by-year (compounded) net profits
performance again on an incremental basis compared to the $1.00 case. As would be expected,
time lags in the penetration of segment A, under
the price reduction strategies, result in an early
profit penalty compared to the $1.00 case. This penalty is later overbalanced by the additional sales
dollars accruing from earlier (on the average)
penetration of segment A under the price reduction strategies versus the status quo price case.
The overall performance of each pricing strategy
on Everclear's cumulative, compounded net profits
position (expected value basis) at the end of the
5-year planning period is shown in Table 3. These
values were obtained by application of the formula
shown in Table 2.
Table 3 shows that all of the price reduction
strategies yield expected payoffs which exceed the

$1.00 case. These additional profits stem from two

principal sources: (a) the higher profits generated
in the middle portion of the planning period, as
a function of the increased probability of effecting
penetration of market segment A, and its associated effect on Kromel industry sales in market
segments B, C, and D; and (b) the higher market
share for Everclear, resulting from the infiuence
of the price reduction strategies on lowering the
probability of capacity expansion and/or entry by
Kromel competitors (existing or potential). These
combined factors overbalance the lower profit margins per pound associated with the price reduction
strategies compared to the $1.00 case.
However, a relevant question arose concerning
the infiuence of the more favorable market share
factor (under the price reduction cases) on the
outcomes of these strategies vs. the $1.00 case.
Suppose that no favorable difference in market
share were obtained under the price reduction
strategies compared to the no-price reduction case.
That is, suppose the probability that lower Kromel
price would discourage future competitive expansion of Kromel industry capacity in the 1963-64
period were zero. How would this affect Everclear's profit position?
In order to test the impact of this variable on
Everclear's cumulative, compounded net profits, the
market share factor was held constant at the trend
level estimated under the no-price reduction, or
$1.00 case, over the simulation period. This analysis
resulted in the information given in Table 4.
It is clear from Table 4 that the market share
factor is important in producing Everclear's higher
profit position as associated with the price reduction alternatives noted in Table 3. If increased

Bayesian Decision Theory In Pricing Strategy

13

Millions
of Dollars
5.0

5 .80 CASE

N.

2.5
$ .85 CASE

5 .13 CASE

REFERENCE BASE
SI.00 CASE

-2.5
1961

1962

1963

1965

YEAR END
(Coded data)
Fir.T.-RE 4. Compounded year-by-year net profits of Everclear Plastic^
Co. (compound rate equals 6% annually).

share for Everclear were not obtained in the 196365 period (relative to the share expected under
the SI.00 case), all strategies would yield close to
equal payoffs. That is, over the planning period,
the increased sales volume resulting from earlier
(on the average) penetration of segment A under
the price reduction strategies just about balances
the less favorable profit margins associated with
these strategies.
^ However, beyond the planning period, all strategies have for all practical purposes accomplished
penetration of segment A. The impact of higher
market share for Everclear thus assumes an important role toward maintaining higher payoffs for
the price reduction cases versus the $1.00 case.
When computer run results were analyzed for
the sub-cases (varying the total market forecast
and cost of capital variables), it was found that
the study outcomes were not sensitive to these
factors. Although the absolute levels of all payoffs
changed, no appreciable change was noted in their
relative standing.
In Summary
This illustration has shown two principal findings regarding the expected payoffs associated with

the alternative courses of action foi-mulated by

Everclear: (a) all price reduction strategies result in higher expected payoffs than that associated
with the status quo pricing case and of these, the
$.80 case leads to the largest expected value; (b)
the higher payoffs associated with the price reduction strategies are quite sensitive to the assumption that Everclear's future market share would
be favorably influenced by reductions in Kromel
price.
Everclear's management is now at least in a
position to appraise the financial implications of its
marketing assumptions in order to arrive at a
reasoned selection among alternative choices.
Implications
The preceding illustration indicates the extent
of problem detail which can be (and frequently
must be) introduced to refiect adequately the characteristics of real market situations. Nevertheless,
this illustration omits some important features of
Bayesian decision theory.
First, payoffs were expressed in monetary terms
(cumulative, compounded net profits) rather than
utility, in the von Neumann-Morgenstern sense, as

Journal of Marketing, January, 1963

14

TABLE 3
CUMULATIVE, COMPOUNDED N E T PROFITSEVERCLEAR PLASTICS CO.

(1961-65)

Price strategy
$1.00
.93
,85
.80

case
case
case
case

End of peri.od
profit position
$26.5
30.3
33.9
34.9

million
million
million
million

TABLE 4
PROFIT POSITIONMARKET SHARE HELD CONSTANT

(Everclear's Cumulative, Compounded Net Profits; 1961-65)

Price strategy
$1.00
.93
.85
.80

case
case
case
case

discussed by Schlaifer.^ One assumes implicitly,

then, that utility is linear with money. As tempting
as this assumption may be, some small-scale studies
at Du Pont in which attempts were made to construct empirical utility functions raise some questions regarding the assumption of linearity. However, this feature of the Bayesian approach may
well take many years of further education and
development before it may find regular application
on the industrial scene.
Second, while a plethora of Bayesian prior probabilities were used in this problem, no mention
was made of analyzing sample data and calculating
posterior probabilities. How does one investigate
states of nature in problems of this type? Certainly the problems of conducting meaningful experiments are hardly trivial in pricing problems,
or the general area of market planning.
Third, just how detailed a structure can be warranted, particularly when the imputs to the problem
are largely subjective in character? One may obviously over-structure as well as under-structure a
problem. This caveat, however, applies to all model
building. While sensitivity analysis may be used to
shed light on which variables "make a difference,"
the fact remains that the model-building process is
still based largely on the builder's intuitive grasp
of problem essentials and the interplay between
analyst and decision maker. The structure of the
problem discussed in this article turned out to be
complex precisely because the variables included
were deemed important by the decision maker (s).
And part of the analyst's job is thus to examine the
impact of supposedly important variables on the
relevant payoff junction and then feed back his
findings to the decision maker.
2 Same reference as footnote 1, Chapter 2.

End of period
profit position
$26.5 million
26.9 million
27.4 million
25.2 million

Finally, in conducting this study, realistic problems have a way of generating quite a lot of arithmetic detail, for example, a multi-stage set of alternative states of nature and payoffs. Implementation
of the Bayesian approach must, therefore, frequently be aided by recourse to a high-speed computing device. Moreover, a computer model also
facilitates the task of running sensitivity analyses
concerning, either changes in probabilities originally assigned to states of nature or changes in the
payoff values related to any particular combination
of state of nature and course of action.
Our experience has indicated that the Bayesian
approach, even coupled with the ancillary techniques
of computer simulation and sensitivity analysis,
does not offer any foolproof procedure for "solving"
market planning problems. Still, it would seem that
this method does offer definite advantage over the
more traditional techniques usually associated with
market planning. Traditional techniques rarely consider alternative states of nature, let alone assigning prior probabilities to their occurrence. Moreover, traditional market planning techniques seldom
provide for testing the sensitivity of the study's
outcomes to departures in the basic assumptions.
At the very least, the Bayesian model forces a
more rigorous approach to market planning problems and offers a useful device for quickly finding
the financial implications of assumptions about the
occurrence of alternative states of nature. In time,
this procedure coupled with a more sophisticated
approach to the design, collection, and interpretation of field data appears capable of providing an
up-to-date and flexible means to meet the more
stringent demands of dynamic decision situations,
so typical in the problems faced by the marketing
manager.