469-4 - CHAPTER 4 - ESTIMATING DEMAND Knowing (estimating)...

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CHAPTER 4 - ESTIMATING DEMAND Knowing (estimating) the demand for its product is crucial for a firm. Why? We have been using demand equations (Q d = 580 - 2P) without indicating exactly where they come from. In CH 4, we discuss how a firm can Estimate Demand for its products. It the responsibility of a firm's business economists and forecasters (or external economic consultants) to estimate and construct demand equations for a firm's products, for example: Q D = 25 + 3 Y + P c - 2P This assumes that we can accurately predict the firm's TR and Profits at various prices and income levels. Estimating demand and making forecasts brings up 3 issues / questions: 1. What is the best (most accurate) forecasting equation? 2. How much does the equation explain or NOT explain? How accurate is the forecast? What about the size and likelihood of forecast errors? 3. What are the profit consequences of forecast errors? We focus on Issue #1 in this chapter. SOURCES OF INFORMATION TO ESTIMATE DEMAND CONSUMER SURVEYS can be used to ask consumers directly about buying behavior, face-to-face, telephone, direct mail, Internet, at checkout, etc. For example, the Houston-FL airline could ask a randomly selected, statistically valid group of consumers about their travel plans, prices, services, convenience, feelings toward the competitor, the impact of a recession/expansion on travel plans, etc. From this survey, the firm could possibly construct a demand equation like the one above. COURTYARD BY MARRIOT : Classic example of how the consumer survey method was used to design a new type of hotel - informal, small, high-value hotel for price sensitive business and vacation travelers. See pages 138 - 139 for the features that were considered. The final design was actually much different than what Marriot envisioned. Courtyard Marriots have been successful and were subsequently copied: e.g. Holiday Inn Express. SURVEY PITFALLS 1. Sample bias occurs when the sample is NOT RANDOM. Example: Political poll, asking only Republicans or Democrats. Poll on school vouchers, asking only school teachers, etc. 1936 election poll predicted Alfred Landon (R) would win over Roosevelt. 2. Response bias occurs when consumers' answers are biased, e.g. giving answers the questioner wants to hear, or overestimating income, or underestimating age, etc. ECN 469: Managerial Economics Professor Mark J. Perry 1
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3. Response accuracy occurs when potential consumers cannot accurately assess their willingness to buy at various prices - answering abstract what-if questions are difficult to answer with accuracy. 4. Cost - Consumer surveys are costly. CASE STUDY - NEW COKE: 1985, Coca-Cola introduced New Coke, after 4 years of research, 190,000 taste tests. New Coke was consistently favored over Old Coke and Pepsi in the taste tests, but failed miserably when introduced. Old Coke (Coke Classic) had to be revived. Illustrates the pitfalls of survey based research. CONTROLLED MARKET STUDIES
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469-4 - CHAPTER 4 - ESTIMATING DEMAND Knowing (estimating)...

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