Mechanism for Supporting Unstructured Decision-Making Processes - Assignment Example

Case Study-Economics Student’s Name: Instructor’s Name: Course Code: Date of Submission: Question 1 It has been assumed been assumed that managers are rational beings and thus, would engage in exercises that maximises returns on investment. Hodgkinson and Starbuck (2008, p. 457) notes that rational decision making process is ability to present alternatives and choose the feasible one. In bounded rationality, it is assumed that people (managers) are goal oriented. In this case the goal of the managers is to make profit. The need to maximise profits is connect to the theories of pleasure maximisation (Jones, 1999, p. 297). The non-consequentialism theories like utilitarianism encourage decision makers to choose the options which will provide more pleasure as compared to pain (Chandra, Krovi and Rajagopalan, 2009, p. 48). In this case, the pleasure is profit maximisation and the pain is the loss. Thus, a manager as the overall person who is answerable to the board based on the expectation that the role of business is to make profits must have strategies of ensuring profit maximisation. This kind of argument was the initial belief on how managers made their decisions about business process. However, this approach to decision making about profit maximisation has been countered by the behavioural economists. Hebert Simon (1993 cited in Tarter and Hoy, 1997, p.213) notes that “decisions are rational if they are appropriate to the accomplishment of specific objectives”. Owing to demands on human cognition, numerous unpredictable consequences and unconscious bias among other, rationality is not easily attained on complex matters. This forces managers to find the best of the satisfactory options. Satisficing theory deviates from the optimising strategy by encouraging adoption of realistic satisfactory outcome and not necessarily the best one (Tarter and Hoy, 1997, p.214). This is why it is common for managers to set performance objectives for employees and departments for each financial year. If this is achieved, they are likely to raise the targets and if not, based on the conditions the target might be lowered (Derek, 2005, p.156). Question 2 The question of competition in these two market structures can be understood from long and short run basis. Makiw (2009, p.348) observes that a monopolistic competitive firm has product which is different from those offered by other firms. In addition, as compared to perfect competitive firm, monopolistic competitive firm has a downward-sloping demand curve while competitive firm has horizontal demand curve at market price. This kind of experience allows them to follow monopolist approach of profit maximisation. In this perspective, “they choose to produce the quantity at which at which marginal revenue equals marginal cost and then uses its demand curve to find the price at which it can sell the quantity”. The emerging theme is that firms in monopolistic completion chooses their quantity and prices in the short run. On the other hand, Jain & Trehan (2010, p.243) observes that perfect competition is “a market situation where there is large number of buyers and sellers. The sellers sell homogenous product at a uniform price and enjoy freedom of enterprise and there is perfect knowledge. The price is determined not by the firm, but by the industry”. Market surveys are used by firms to establish market dynamics for a particular industry. The information identified in the analysis is used to state marketing opportunities and problems. Secondly, they are used in generating, refining and evaluating marketing actions. Thirdly, they are used in monitoring marketing performance and improving marketers understanding of marketing as a process (Aaker, Kumar and Day, 2001, p.2, 3 and 4). From the above observation, firms in monopolistic completion are less likely to use market surveys since they have the capacity of choosing the quantity to produce and prices to sell at in the short run outside the industry forces which firms in competitive markets encounter so long as price exceeds average total cost. On the opposite in perfect competition the firms are price taker rather than price maker and quantity adjuster (Jain & Trehan, 2010, p.244). This pushes them to engage in constant market research. Question 3 Information collected from surveys is important for sellers in numerous ways. The first is on setting price. In a perfect competition market structure, price of products is set by supply and demand of the product (Jain & Trehan, 2010, p.244). Sellers which have information about the quantity demanded by the buyers are able to know the amount to supply and thus, other things being constant; they are able to influence the price. In a nutshell, an increase in demand while supply remains constant or reduces the prices increases. Secondly when demand reduces and supply remains constant or increases the prices go down. On the other hand, when supplies increases and demand remains constant or reduces the price would go down and if the supply reduces while demand remains constant or goes down the price would increase. Price differentiation is critical aspect of marketing strategy. One specific area that information possessed by sellers can be applied is on price discrimination so as to mop supply and increase profits. Different market segmentations have different purchasing power. This is based on geographical locations and demographic attributes among others. The emerging information can be used to gauge price elasticity for different segment of the markets (Frank, 2010, p.391 & 392). The diagram below shows that with increase in price elasticity reduces. Thus, with information, the sellers are able to know at what margins they should increase their prices for different market segments. Figure 1: Price elasticity of demand Source: The Analyst Diary, 2008 Question 4 To offer value to the clients, call for proper research about marketing dynamics such as consumer behaviour, target market population, decision making process and distribution channels among others. This kind of information will help the firm develop a product or service that captures the trends noted in the market information. This would further guarantee a maximum satisfaction while ensuring non haphazard product development (Kotler & Keller, 2009). Marketing process forms a fraction of the functional business areas. Proper marketing exploits customer attitudes, preferences and behaviours. Marketing basically deals with firm-client interaction through delivery of required service/product. Marketing research plays a pivotal role in connecting the marketer to the consumer through informed decision. Marketing research deals with systematic collection of information through the use of statistical tools about marketing products/services (Onkvisit & Shaw, 2008, p. 7). The principal aim of marketing research is to pinpoint how marketing mix (7Ps) and its elements affect customer behaviour. Solution Consultants (2012) provides a list of five methods frequently used by businesses to obtain information about customer’s preferences and habits. These include surveys, focus group discussions, observation and field trials. Conducting a survey involves using questionnaires so as to collect information. These questionnaires can be administered through face-to face survey, through online portal, through mail and through telephone. The researcher according to the desired information frames the questions as per the expectations. These questions might be open ended, closed and leading among others. The second method would be focus group discussion where the interviewer holds session with stakeholders. The third is personal interview with key informants or those identified for the same. These people are able to provide feedback about the said product in relation to pricing, quality and packaging among others. The last method would be to conduct field trials on pilot basis. Under this approach, the producer selects a segment of the market which acts as specimen which provides required critical information about the product, market trends and areas for improvement. Question 5 Price discrimination emerges when the same manufacturer and or service provider sales identical goods or services at different prices for different groups of customers yet there is no difference in their production costs. This process is also known as yield management or price differentiation (Machlup, 1955, p.397 & 398). From a theoretical perspective, McAfee (2008, p.465 & 466) notes that price discrimination is only possible under oligopolistic and monopolistic market structures. The reason behind this argument being that in perfect competition scenario where there are perfect substitutes, no transactions cost and availability of perfect information the same can’t happen. This is because the quantity produced and selling price is determined by the market and not the producers or manufacturer. In attempt of doing price discrimination in perfect completion, the buyer who bought the good at a comparatively lower price may arbitrage and sell to the consumers who are acquiring the same at higher price with expectation of gaining out of that price difference. The use of behavioural economics techniques is likely to lead to more price discrimination. To shed more light on this argument, let us examine it in relation to third degree price discrimination which employs factor like customers’ attributes in relation to their willingness to buy certain goods at a given price or how they respond to price change (price of elasticity demand); (Frank, 2010, p.391 & 392). The main determinant for this case is percentage of income. From behavioural economics, it generalised that segment like students have different willingness to pay (demand) in relation to price change as compared to other average consumers since their disposable income is low. Figure 2: Relatively Elastic Demand for Students Source: AP Economics, 2012 Figure 3: relatively unresponsive to change adult consumption Source: AP Economics, 2012 From the diagram above two diagrams, a price change towards the higher end affects student consumers making them purchase less quantity as compared to other average adults and vice verse (they have relatively elastic demand as compared to other adults). This then force the manufacturer to sell the same goods at a lower price to students as compared to other segment of the population based on demographic attribute of age and disposable income and thus, capturing market surplus. This is because the revenue loss is higher than the revenue gain as result of selling to students at higher price as compared to the other average adults. Question 6 The rationality of this shopper buying a kilogram of oranges for 5 dollars and leaving bananas being sold at 12 dollars per kilogramme in the first instance and then in the second buying the same kilogramme of oranges for 12 dollars while leaving Bananas which were retailing at 3 dollars can be analysed through two perspective under the economic theory and utilitarian. The first is the argument that he or she is rational and the second is the argument that the buyer is irrational. In the economic theories, decision makers are assumed to be rational; objective oriented and should go for the alternative that gives maximum pleasure rather than pain (Jones, 1999, p. 297; Hodgkinson and Starbuck, 2008, p. 457). However, the lingering question is rationality in which perspective? Saving money or deriving utility irrespective of the costs? This is where the bone of contention emerges. Since the rationality/ irrationality can be seen from making saving on the money since all the two are fruits and source of vitamin C. from this point of view we would argue that the buyer is irrational in his/her decision since all of these provide vitamin C (substitute products). In line with this argument, one would say in the first purchase, the buyer made a correct decision since the cost of oranges was lower as compared to bananas. However, the second one was irrational since he spent higher fortunes that he/she would have avoided since the substitute product was retailing at a lower price. On the other perspective, at what cost the buyer is very rational based on the utility derived, taste & preferences and brand loyalty. If the consumer feels that he/she derives more satisfaction from oranges to bananas he is justified. Moreover, if the decision to purchase is on medical grounds the same decision is justifiable. This reflects the fact that the buyer is objectively driven so as to meet her/her pleasure irrespective of the cost (utilitarianism). References Aaker. D.A., Kumar, V. And Day, G. 2001. Marketing research. New York: John Wiley and Sons. AP Economics, 2012. Chapter 18: Elasticity. Retrieved on 28 December, 2012 from: http://www.crawfordsworld.com/rob/ape/APEMcConnellNotes/M1McConnell018.html. Chandra, A., Krovi, R. & Rajagopalan, B. 2009. Risk Visualization: A mechanism for Supporting Unstructured decision Making Processes. The International Journal of applied management and Technology, 6(4): 48-70. Derek, L. et al. 2005. Human resource management. London: prentice Education Limited. Frank, R. H. 2010. Microeconomics and Behaviour, 8 Edition. New York: McGraw-Hill Irwin. Hodgkinson, G. P. & Starbuck, W. I. 2008. The Oxford handbook of Organizational Decision Making. Oxford: Oxford University Press. Jain, T. R. & Trehan, M. 2010. Macroeconomics and Indian Economy. New Delhi: V. K. Publications. Jones, B. D. 1999. Bounded Rationality. Annual Review of Political Science, 2, 297-321. Kotler, P. and Keller, K. L. 2009. Marketing management 13th edn, Upper Saddle River. New Jersey: prentice hall. Machlup, F. 1955. Characteristics and Types of price Discrimination p.395-438, in Business Concentration and Price Policy. Princeton: Princeton University Press. Mankiw, N. G. 2009. Principles of Economic 5 Edition. Mason, OH: South-Western, Cengage Learning. McAfee, R. P. 2008. Price Discrimination, in 1 ISSUES IN COMPETITION LAW AND POLICY 465. ABA Section of Anti Trust Law. Onkvisit, S. and Shaw, J. J. 2008. International marketing: strategy and theory. New York: Routledge. Tarter, C .J. & Hoy, W. K. 1998. Toward a contingency theory of decision making. Journal of Educational Administration, Vol. 36, No. 3, pp.212-228. The Analyst Diary, (24 August, 2008). Elasticity of demand and supplies. Retrieved on 28 December, 2012 from: http://theanalystdiary.com/?m=200808. 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