A Seattle Entrepreneur Must Decide on the Size of a Latte

question 52

Essay

A Seattle entrepreneur must decide on the size of a latte stand to construct. The manager has narrowed the choice down to large or small. If he builds large and experiences low demand he could grin and bear it for a $200 daily profit, lower prices ($225 daily profit), or hire street performers to attract attention ($175 daily profit). If he builds small and experiences high demand he could do nothing ($175 profit per day), stay open longer hours (profit of $225/day), improve processes ($250/day profit), or raise prices ($200/day profit). Building large for high demand has an expected payoff of $250/day and building small for low demand has an expected payoff of $175/day. There is a 0.7 probability of high demand and 0.3 probability of low demand. Sketch a decision tree for this scenario and determine what size stand should be constructed to slake the unquenchable thirst of caffeine addicts.

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Definitions:

Oligopolists

Firms that dominate an industry, characterized by a small number of entities controlling a large market share.

Price War

A competitive situation where rival companies repeatedly cut prices to undercut each other, often to gain market share.

Oligopoly

A market setup where a few companies dominate by holding a significant market share.

Monopoly Level

A state or degree in which a single company or entity has exclusive control over a particular market or industry.