Management of the New Fangled Softdrink Company believes that the probability of a customer purchasing Red Pop or the company’s major competition, Super Cola, is based on the customer’s most recent purchase. Suppose that the following transition probabilities are appropriate:

a. Show the two-period tree diagram for a customer who last purchased Red Pop. What is the probability that this customer purchases Red Pop on the second purchase?
b. What is the long-run market share for each of these two products?
c. A Red Pop advertising campaign is being planned to increase the probability of attracting Super Cola customers. Management believes that the new campaign will increase to 0.15 the probability of a customer switching from Super Cola to Red Pop. What is the projected effect of the advertising campaign on the marketshares?

Transcribed Image Text:

To Red Pop 0.9 0.1 From rein Red Pop Super Cola Super Cola 0.1 0.9