QUESTION TWO (20 Marks)

XYZ Logistics is considering whether to adopt a high-price or a low-price strategy. The success

of the firm's pricing strategy depends, however, on its competitors' reaction to the firm's pricing

strategy. The firm estimates that if it adopts a high-price strategy, there is a 60% probability that

competitors will respond with a high price of their own, and 40% that they will respond with a

low price. On the other hand, if the firm adopts a low-price strategy, there is a 20% probability

that competitors will respond with a high price, and 80% with a low price. Each pricing strategy

on the part of the firm and competitors' price response (reaction) can occur under three states of

the economy: boom, normal, and recession, with probabilities of 30, 50, and 20%, respectively.

Assume also that the estimated net present value (NPV) of profits of the firm given each pricing

response of the competitors is as presented in the table below