In 1996, McDonald’s (MD) launched Campaign 55, reducing the prices of its “flagship” sandwiches with the objective of regaining market share. Before the launch, suppose MD’s management envisioned two possible outcomes: a strong customer response or a weak response. Industry experts were not very optimistic about the campaign. They assessed the probability of a strong response to be .40. MD predicted an expected profit of $50 million if the response proved to be strong. If the immediate customer response was weak, management believed that all was not lost. If MD could persuade the majority of its franchisees to back and help fund the campaign, the resulting profit would be $20 million. However, if the majority rose up against the campaign, the red ink would fly, and McDonald’s profit would be -$100 million. MD considered these two outcomes to be equally likely.
a. Given these assessments, construct a decision tree to determine MD’s expected-profit-maximizing course of action.
b. Suppose that MD has the flexibility to try the campaign but to terminate it if the initial response is weak, thereby limiting its total loss to $20 million. (It must pull the plug before knowing whether the franchisees are for or against the campaign.) Again, construct a decision tree to determine MD’s expected-profit-maximizing strategy.