61157 - Chapter 7 Empirical Demand Functions Optimal...

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7.1 Chapter 7 – Empirical Demand Functions Optimal pricing is critical to the success of any business. Given the stakes, it is frequently worth investing significant resources in determining the optimal price. Large firms have pioneered the use of econometrics in estimating demand functions to serve as the base for determining the best price.
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7.2 Empirical Demand Functions Empirical demand functions are demand equations derived from actual market data. There are two basic methods for demand estimation Direct Methods Consumer Interviews Market Studies and Experiments Indirect Methods (econometrics/regression techniques)
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7.3 Consumer Interviews Estimation of demand is based on asking individual consumers about their “potential” purchase decisions. Essentially playing the “what if” game – If the price is $10, how many units would you purchase? However, if price is decreased to $8, how many units would you now purchase? Sample must be representative of population. Random samples Response bias occurs when hypothetical answers are given to hypothetical questions. “People Lie” Sometimes unable to accurately answer the question
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7.4 Market Studies and Experiments Market studies & experiments are the economists attempt to control or hold constant many of the factors affecting the amount purchased. All factors except price are held constant and the amount purchased is observed in response to variation in price.
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Market Studies Use the market to directly react to changes in price M&M/Mars changed size of product and held price constant(effectively reduced price per oz). Response was positive and substantial
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61157 - Chapter 7 Empirical Demand Functions Optimal...

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