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• Consumer interviews• Range from stopping shoppers to speak with
them to administering detailed questionnaires
• Potential problems Selection of a representative sample, which is a
sample (usually random) having characteristics that accurately reflect the population as a whole
Response bias, which is the difference between responses given by an individual to a hypothetical question and the action the individual takes when the situation actually occurs
Inability of the respondent to answer accurately
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Direct Methods of Demand Estimation• Market studies & experiments
• Market studies attempt to hold everything constant during the study except the price of the good
• Lab experiments use volunteers to simulate actual buying conditions
• Field experiments observe actual behavior of consumers
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Empirical Demand Functions
• Demand equations derived from actual market data
• Useful in making pricing & production decisions
• In linear form, an empirical demand function can be specified as
RQ a bP cM dP where is quantity demanded, is the price of the goodor service, is consumer income, & is the price of somerelated good
R
Q PM P
R
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Empirical Demand Functions
• In linear form• b = Q/P
• c = Q/M
• d = Q/PR
• Expected signs of coefficients• b is expected to be negative
• c is positive for normal goods; negative for inferior goods
• d is positive for substitutes; negative for complements
RQ a bP cM dP
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Empirical Demand Functions
• Estimated elasticities of demand are computed as
RQ a bP cM dP
PˆE bQ
PˆE bQ
M
Mˆ ˆE cQ
M
Mˆ ˆE cQ
RXR
PˆE dQ
RXR
PˆE dQ
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Nonlinear Empirical Demand Specification• When demand is specified in log-linear
form, the demand function can be written as
b c dRQ aP M P
To estimate a log-linear demandfunction, convert to logarithms
To estimate a log-linear demandfunction, convert to logarithms
RlnQ lna b ln P c ln M d ln P In this form, elasticities are constant In this form, elasticities are constant
ˆEb MˆEc XR
ˆEdˆEb MˆEc XR
ˆEd
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Demand for a Price-Setter
• To estimate demand function for a price-setting firm:• Step 1: Specify price-setting firm’s