Based on the four possible options, each of these options would have its merits and demerits. The first option of orderly development would cost more than any other option because the company would invest in everything that is required in the development of pina colada. This notwithstanding, the company would enjoy market dominance as Mr. Besnette claims. Conversely, if the company is to wait for its competitors to introduce the product in the market and respond by initiating a crash program, then it is likely to save a lot of money in research and development. Nevertheless, it is not definite that the company’s competitors will do this in the next one year because this speculation is based on probability. In addition, the company’s discounted future profits will reduce by half.
With regard to modest development efforts that would later be followed by a crash program after six months, the company is likely to save money on research and development, but its competitors might dominate the market. This means that even if the company will save money on research and development, its competitors might have added advantages over the company in terms of market dominance. The last option would be to do nothing about the issue meaning that the company would not produce pina colada or even conduct market research.With reference to these options, it would be advisable for the company to adopt modest development efforts within the first six months and then launch its product into the market. If the company is to adopt this strategy, it is likely to save money meant for research and development because after all other companies are likely to produce the product after the company develops it.
With regard to Bayes theorem, the difference between the two types of probability is that prior probability is calculated before an event takes place while posterior probability is calculated after an event takes place. For instance, assume that we are interested in calculating the probability of event C taking place. If we calculate this probability before event C takes place, then P(C) will be the prior probability. This will be in relation to the fact that we will not be having empirical information regarding event C. On the contrary, if we calculate this probability after event C takes place, we shall have posterior probability because at this point we shall be having empirical information about event C. At this juncture, we might realize that for event C to occur, event D should occur first. With such a case, we can alter our prior probability regarding event C to P(C/D). Mathematically, we end up with the following formula
As an illustration, assume that we are interested in calculating the probability of a person developing cancer. If we calculate this probability without having any data regarding this person, we end up with a prior probability. Conversely, if we are to calculate this probability after we realize that the person’s age could be a contributing factor towards cancer development, then we could factor age in our calculation. In this case, we could end up with a posterior probability (Lee et al., 2013). With regard to marketing, prior probability is calculated before a product is launched into the market whereas posterior probability is calculated after a product is launched into the market.
Lee, C.et al. (2013). Statistics for business and financial economics.New York: Springer.