Dr. Michael R. Hyman

Use of Bayesian Decision Analysis to Assess if Conducting Marketing Research

is Worthwhile

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Reading (from Dillon, Madden, and Firtle (1990)

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Decision Tree

9Table contains alternatives, states of nature, and consequences

Example #1

Payoff Table for Pricing DecisionPrior probabilities

Optimal choice without additional research information

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Conditional Probability of Getting Each Test Market Result Given Each State of Nature

Read by Row (Zk) within Column (Sj)

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Revision of Prior Probabilities in Light of Possible Test Market Results

Notice difference in revised (post-research) distribution of demand probabilities

Sj = State of Nature; Zk = Level of Success in Test

Σ=1.0

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Optimal choice if test market result is Z1

Optimal choice if test market result is Z2

Optimal choice if test market result is Z3

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Example #2

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Solution to Example #2

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Revision of Prior Probabilities in Light of Research Information that Surveys Unlimited Might Provide

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Example #3—You Solve

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Study Questions