1a_Demand

1a_Demand - Demand Elasticity and Customer Power ManEc 387...

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Nile W. Hatch © 2002 – 2008 ManEc 387 Economics of Strategy Demand, Elasticity, and Customer Power 1
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Nile Hatch © 1996 – 2008 Exploring Industry Structure Threat of Potential Entrants Bargaining Power of Suppliers Customer Power & Preferences Rivalry between Competitors Threat of Substitutes 2 2
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Nile Hatch © 1996 – 2008 How to measure buyer power? • Buyer behavior relative to a product determines (limits) our ability to change price • One way to measure this behavior is elasticity— higher elasticity means greater buyer power – Typically because many alternative product options available – Illustrates the importance of substitutes 3 3
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Nile Hatch © 1996 – 2008 Market Demand Curve • Shows the amount of a good that will be purchased at alternative prices. • Law of Demand – the demand curve is downward sloping Quantity D Price 4 4
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Nile Hatch © 1996 – 2008 Determinants of Demand • Price of the product • Prices of substitutes • Prices of complements • Income • Advertising • Population changes • Consumer expectations 5 5
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Nile Hatch © 1996 – 2008 The Demand Function • An equation representing the demand curve Q x d = f(P x , P Y , M, H,) Q x d = quantity demand of good X. P x = price of good X. P Y = price of a substitute good Y. M = income. H = any other variable affecting demand 6 6
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Nile Hatch © 1996 – 2008 Change in Quantity Demanded Price Quantity D 0 A to B : Increase in quantity demanded 4 10 A 7 6 B 7 7
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Nile Hatch © 1996 – 2008 Price Quantity D 0 Change in Demand 6 7 13 D 1 D 0 to D 1 : Increase in Demand 8 8
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Nile Hatch © 1996 – 2008 Where do demand curves come from? Experimental Data • Experiments – Raise and lower price systematically over time and watch what happens to quantity – Limitation: harder to control for changes in external factors (you may get a “wiggly” curve!) 9 9
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Nile Hatch © 1996 – 2008 Where do demand curves come from? Survey Data • Market Research – Surveys in which consumers are asked to tradeoff bundles of goods against price or other bundles in order to determine relative value and demand at given prices – Limitations: • Expensive • Sampling bias • Perception bias—spending real money is different than checking boxes on a survey – e.g., pricing for gourmet ice cream sandwiches 10 10
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Consumer Survey Methods • Monadic Pricing – Respondents are presented with a product at one price only and are asked whether they would purchase the product at that price. Two or more survey versions are created to test different price points. • Gabor Granger – Like Monadic testing, but each respondent is exposed to a series of prices. 11
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1a_Demand - Demand Elasticity and Customer Power ManEc 387...

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