Case No.

In the last few years, colleges and universities have signed exclusivity agreements with a
variety of private companies. These agreements bind the university to sell that company’s
products exclusively on the campus. Many of the agreements involved food and beverage
firms. A large university with a total enrolment of about 50,000 students has offered
Pepsi-Cola an exclusivity agreement, which would give Pepsi exclusive rights to sell
their products at all university facilities for the next year and an option for future years. In
return, the university would receive 35% of the on-campus revenues and an additional
lump sum of $200,000 per year. Pepsi has been given 2 weeks to respond.

The management at Pepsi quickly reviews what they know. The market for soft drinks is
measured in terms of the equivalent of 10-ounce cans. Pepsi currently sells an average of
22,000 cans or their equivalents per week (over the 40 weeks of the year that the
university operates). The cans sell for an average of 75 cents each. The costs, including
labor, amount to 20 cents per can. Pepsi is unsure of its market share but suspects it is
considerably less than 50%. A quick analysis reveals that if its current market share were
25%, then, with an exclusivity agreement, Pepsi would sell 88,000 cans per week or
3,520,000 cans per year (calculated as 88,000 cans per week * 40 weeks).

The only problem is that Pepsi does not know how many soft drinks are sold weekly at
the university. Coke is not likely to supply Pepsi with information about the sales of its
brands, which together with Pepsi’s line of products constitutes virtually the entire
market.

A recent graduate of a business program volunteers that a survey of the university’s

students can supply the missing information. Accordingly, she organizes a survey that
asks 500 students to keep track of the number of soft drinks they purchase on campus
over the next seven days. The responses are:

2 1 2 1 0 1 2 2 1 0
2 0 2 1 2 1 1 3 0 3
1 0 3 0 0 2 1 2 2 0
0 0 2 1 1 1 1 0 0 1
1 0 4 1 1 0 2 0 1 3
0 0 1 2 0 1 0 3 1 1
1 4 0 1 0 2 2 1 1 1
1 0 2 1 3 3 0 0 0 1
1 1 2 1 3 1 2 0 3 1
2 3 0 4 2 0 1 2 0 1
4 1 1 1 2 1 2 0 4 0
4 2 4 1 2 3 0 1 1 2
1 3 4 0 1 1 0 1 0 0
2 1 3 1 1 2 1 0 2 3
5 1 2 1 1 2 1 1 2 2
0 0 1 1 1 2 0 1 2 2
1 0 0 1 4 0 4 2 1 2
0 0 2 1 4 2 0 0 0 1
 0 0 3 1 0 1 0 1 4 1
1 1 0 3 2 0 2 2 0 1
3 1 0 0 2 4 2 1 3 1
2 0 1 2 5 0 1 1 4 2
0 1 2 1 3 1 1 1 2 3
0 2 3 0 1 4 0 2 0 0
0 1 1 1 2 1 1 3 1 0
0 1 3 0 0 0 0 1 1 0
3 1 0 1 1 1 1 0 1 1
3 2 1 1 0 1 2 1 2 2
2 1 2 2 1 1 0 5 4 2
2 2 0 1 1 0 0 2 0 2
1 0 3 4 4 0 2 0 3 2
2 0 2 1 2 0 1 2 2 2
0 3 2 1 1 3 1 1 0 1
1 1 0 2 4 2 1 1 2 2
0 0 1 1 1 2 2 4 2 2
2 1 2 2 1 2 0 0 0 2
1 3 0 2 1 0 0 1 0 0
2 2 0 0 2 1 1 3 1 0
1 1 1 1 0 0 3 2 1 2
1 3 0 1 2 2 0 1 3 2
3 2 1 1 1 3 2 2 1 2
2 1 1 0 1 0 0 1 1 1
0 1 3 1 1 1 3 0 0 1
1 1 1 2 0 0 0 0 1 1
2 2 2 3 0 0 0 3 0 1
0 2 0 1 1 2 2 3 1 2
3 0 1 1 2 1 2 1 2 4
0 2 0 0 1 2 0 0 1 3
2 2 1 2 2 2 2 2 1 1
2 0 2 1 0 2 3 0 2 2

Perform a statistical analysis to extract the needed information from the data. Estimate
with 95% confidence the parameter that is at the core of the decision problem. Use the
estimate to compute estimates of annual profit. Assume that Coke and Pepsi drinkers
would be willing to buy either product in the absence of their first choice.

On the basis of maximizing profits from sales of soft drinks at the university, should
Pepsi agree to the exclusivity agreement?

While the executives of Pepsi-Cola are trying to decide what to do, the university informs
them that a similar offer has gone out to the Coca-Cola Company. Furthermore, if both
companies want exclusive rights, then bidding war will take place. The executives at
Pepsi would like to know how likely is it that Coke will want exclusive rights under the
conditions outlined by the university.
Perform a similar analysis to the one you did before, but this time from Coke’s point of
view.

Is it likely that Coke will want to conclude an exclusivity agreement with the university?
Discuss the reasons for your conclusions.

Case No.2

A number of years ago, the Michigan legislature passed a law requiring insurance for all
drivers. Prior to this event drivers did not have to be covered by insurance. The law was
challenged on the grounds that it discriminated against poor people who would not be
able legally to drive. At issue at the trial was the number of Michigan motorists who
would be coerced by the law into buying insurance. To determine this, it was necessary to
count the number of uninsured motorists. (These would be the people who would be
forced by law to buy insurance.) There were a total of 4,505,665 license plates for
passenger vehicles registered in Michigan at the time. An investigation of each one of
these to determine whether the drivers had insurance coverage would be prohibitively
expensive and time-consuming. It was decided that the state would draw a random
sample of motorists and estimate the number of Michigan’s driving population who were
uninsured from sample data. A random sample of 249 license plates was drawn using
statistically sound sampling methods. Each was investigated to determine its insurance
status. The license plates sampled were placed in one of three categories. The categories
and the code on the disk are as follows:

1 Insured
2 Not Insured
3 Missing

(License plates that were drawn for the sample but for which investigators were unable to
find the car or its owner were classified as missing.) The data are:

1 1 1 1 1
1 1 1 1 1
1 1 2 1 1
1 2 1 1 1
1 1 1 3 1
1 1 1 1 1
1 1 1 1 1
1 1 1 1 1
1 2 1 1 1
1 1 1 1 1
1 1 3 1 1
2 1 1 1 1
1 1 1 1 1
1 1 1 1 1
1 1 1 1 1
 1 1 1 1 1
1 3 1 1 1
1 1 1 1 1
1 1 1 1 1
1 1 1 1 1
1 1 1 2 1
1 3 1 1 1
3 1 1 1 1
2 1 1 1 1
1 1 1 1 1
1 1 3 1 1
1 1 1 3 1
1 1 1 1 1
1 1 1 1 1
1 1 1 1 1
3 1 1 1 1
1 1 1 1 1
1 1 3 1 1
2 1 1 1 1
1 1 1 1 1
1 1 1 1 1
1 1 1 1 3
1 1 1 1 1
1 3 1 1 1
1 1 1 1 1
1 1 1 1 1
1 1 1 1 1
1 1 1 3 1
1 1 1 1 1
3 1 1 1 1
1 1 1 1 1
1 1 1 1 1
1 1 1 1 1
3 1 3 3 1
1 1 1 1

Your job is to estimate the proportion of all Michigan passenger vehicles that are not
insured. Provide methods for dealing with the missing data. From each method,
determine the upper and lower limits for the estimated number of motorists who would
have been forced by law to buy insurance. Discuss which method is more reasonable.