46102268 Demand Estimation

7/30/2019 46102268 Demand Estimation

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Market Research Approaches To Demand Estimation

Many market research approaches are used for estimation of demand. Following are the most

important of these.1. Consumer surveys and Observational Research

2. Consumer cl inics, and

3. Market experiments.

4. Regression Analysis

Here we briefly examine these methods and point out their advantages and disadvantages and

the conditions under which they might he useful to managers and economists.

1. Consumer Surveys and Observational Research

Consumer surveys involve questioning a sample of consumers about how they would respond to

particular changes in the price of the commodity, incomes, the price of related commodities,

advertising expenditures, credit incentives and other determinants of demand. These surveys can

be conducted by simply stopping and questioning people at a shopping center or by administering

sophisticated questionnaires to a carefully constructed representative sample of consumers by

trained interviewers.

In theory, consumer questionnaires can provide a great deal of useful information to the firm. In

fact, they are often very biased because consumers are either unable or unwilling to provide

accurate answers. For example, do you know how much your monthly butter consumption would

change if the price of butter rose by 10 cents per 100 gms.? If a butter producer doubled its

advertising expenditures? If the fat content of butter were reduced by 1 percent? Even if you triedto answer these questions as accurately as possible, your reaction might be entirely different if

actually faced with any of the above situations. Sometimes consumers provide a response that

they deem more socially acceptable rather than disclose their true preferences.

Depending on the size of the sample and the elaborateness of the analysis, consumer surveys

can also be expensive.

Because of the shortcomings of consumer surveys, many firms are supplementing or

supplanting consumer surveys with observational research. This refers to the gathering of

information on consumer preferences by watching them buying and using products. For example,

observational research has led some automakers to conclude that many people think of their cars

as art objects that are on display whenever they drive them.Observational research does not, however, render consumer surveys useless. Sometimes

consumer surveys are the only way to obtain information about possible consumers' responses.

For example, if a firm is thinking of introducing a new product or changing the quality of an existing

one, the only way that the firm can test consumers' reactions is to directly ask them since no other

data are available. From the survey, the researcher then typically tries to determine the

demographic characteristics (age, sex, education, income, family size) of consumers who are

most likely to purchase the product. The same may be true in detecting changes in consumer


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By Fiaz Ahmed

tastes and preferences and in determining consumers' expectations about future prices and

business conditions. Consumer surveys can also be useful in detecting consumers' awareness of


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an advertising campaign by the firm. Furthermore, if the survey shows that consumers arc

unaware of price differences between the firm's product and competitive products, this may be a

good indication that the demand for the firm's product is price inelastic.

2. Consumer Clinics

Another approach to demand estimation is consumer clinics. These are laboratory experiments

in which the participants are given a sum of money and asked (to spend it in a simulated store to

see how they react to changes in the commodity price, product packaging, displays, price of

competing products, and other factors affecting demand. Participants in the experiment can be

selected so as to closely represent the socioeconomic characteristics of the market of interest.

Participants have an incentive to purchase the commodities they want the most.

The, consumer clinics are more realistic than consumer surveys. By being able to control the

environment, consumer clinics also avoid the pitfall of actual market experiments which can be

ruined by extraneous events.

Consumer clinics also have serious shortcomings, however. First, the results are questionable

because participants know that they are in an artificial situation and that they are being observed.

Therefore, they are not very likely to act normally, as they would in a real market situation. For

example, suspecting that the researchers might be interested in their reaction to price changes,

participants are likely to show more sensitivity to price changes than in their everyday shopping.

Second, the sample of participants must necessarily be small because of the high cost of running

the experiment. Inferring, however, a market behavior from the results of an experiment based on

a very small sample can be dangerous. Despite these disadvantages, consumer clinics can

provide useful information about the demand for the firm's product, particularly if consumer clinics

are supplemented with consumer surveys.

3 Market Experiments

Unlike consumer clinics, which are conducted under strict laboratory conditions, market

experiments are conducted in the actual marketplace. There are many different ways of

performing market experiments. One method is to select several markets with similar

socioeconomic characteristics, and change the commodity price in some markets or stores,

packaging in other markets or stores, and the amount and type of promotion in still other markets

or stores, and record the different responses (purchases) of consumers in the different markets.

By using census data or surveys for various markets, a firm can also determine the effect of age,

sex, level of education, income, family size, etc., on the demand for the commodity. Alternatively,

the firm could change, one at a time, each of the determinants of demand under its control in a

particular market over time and record consumers' responses.

The advantage of market experiments is that they can be conducted on a large scale to ensure

the validity of the results and consumers are not aware that they are part of an experiment. Market

experiments also have serious disadvantages, however One of these is that in order to keep costs

down, the experiment is likely to be conducted on too limited a scale and over a fairly short period


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of time, so that inferences about the entire market and for a more extended period of time are

questionable. 'Extraneous occurrences, such as a strike or unusually bad weather, may seriously

bias the results in uncontrolled experiments. Competitors could try to sabotage the experiment by

also changing prices and other determinants of demand under their control. They could also

monitor the experiment and gain very useful information that the firm would prefer not to disclose.Finally, a firm may permanently lose customers in the process of raising prices in the market

where it is experimenting with a high price.

Despite these shortcomings, market experiments may be very useful to a firm in determining

its best pricing strategy and in testing different packaging, promotional campaigns, and product

qualities. Market experiments are particularly useful in the process of introducing a different

product, where no other data exist. They may also be very useful in verifying the results of other

statistical techniques used to estimate demand and in providing some of the data required for

these other statistical techniques of demand estimation.

4 Regression Analysis

The most used method for demand estimation followed by economists is the regression method.The method involves four steps:

1.Identification of variables which influences the demand for the good whose function is underestimation.2.Collection of historical data on all the relevant variables3.Choosing an appropriate from for the function.4.Estimation of the function

Speci0fication of casual variables comes from the underlying economic theory of demand. Forexample, if we were to estimate the demand function for groundnut oil in India, the relevant causal

variables would be national income at constant pries, price of groundnut oil, prices of vanaspatighee and pure ghee (substitute items) and prices of eggs, fish, meat , gram flour and vegetables(complementary items). By a prior reasoning, demand for groundnut oil might be affected byseveral other variables also, such as consumers tastes and preferences, distribution ofpopulation into rich and poor or between South Indian and North Indian and consumersexpectations about future price of ground nut oil. However, one should note that a model is asimplified version of a true structure, and the model builder faces a lot of constraints such asavailability of data costs of their collection and time constraints within which one would like tocomplete the work demand of demand estimation. For these reasons, a model builder might becontent with the important causal variables only.

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46102268 Demand Estimation

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