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1. Management of a Milk Chocolate Galore company believes that the probability of a customer purchasing its MilkyChoc or the company's major
1. Management of a Milk Chocolate Galore company believes that the probability of a customer purchasing its MilkyChoc or the company's major competition, ChocoMilk, is based on the customer's most recent purchase. Suppose that the following transition probabilities are appropriate:
From MilkyChoc ChocoMilk
MilkyChoc 0.8 0.2
ChocoMilk 0.2 0.8
a. Show the two-period tree diagram for a customer who last purchased MilkyChoc. What is the probability that this customer purchases MilkyChoc on the second purchase?
b. What is the long-run market share for each of these two products?
c. A MilkyChoc advertising campaign is being planned to increase the probability of attracting ChocoMilk customers. Management believes that the new campaign will increase to 0.25 the probability of a customer switching from ChocoMilk to MilkyChoc. What is the projected effect of the advertising campaign on the market shares?