Demand Estimation

Approaches to demand estimation

• Consumer surveys: record the response of a sample of
consumers for changes in its and related goods’ prices,
income, credit incentives, advertising through
questionnaires.
• Observational research: Watch consumers buying in
response to the change factors above through scanners
and people meters.
• Consumer clinics: participants are given money in a
laboratory experiment set up to shop in simulated store
which are affected by changes in the factors.
 Demand Estimation(contd)
• Market Experiments: By selecting several markets with
similar socio-economic environments, collect data on the
response of buyers for changes in the influence factors
including demographics in which every market faces a
different influence factor.
• Virtual Shopping: representative sample of customers
shop in a virtual store simulated on the computer screen.
During course of time various influence factors are
changed to observe the behaviour of virtual shoppers.
Introduction to Regression Analysis
• Example: Sales revenue (Y) depends on
Advertising exp. (X) (unit: mills of Rs)

Yr 1 2 3 4 5 6 7 8 9 10

X 10 9 11 12 11 12 13 13 14 15

Y 44 40 42 46 48 52 54 58 56 60
Regression (contd)
 Regression (contd)
• Objective: draw the line of best fit through the
scatter points of Y and X.
• Line is: Ŷ â  b̂X
t t
• Points above and below the line are written:

Yt  â  b̂X t  e t
 Regression (contd)
• Principle: draw the line in such a way that the
distance between the line and the points is
minimized (best is to minimize the square). Minimize
• n 2 n 2
 et   (Yt â  b̂X t )
t 1 1
• Minimization occurs when
 (X t  X)(Yt  Ŷ)
b̂ 
 2
 (X
t
X )
â  Y  b̂X
 Regression Equation
• Estimated equation is:
• Ŷ  7.6  3.53X
t t
• Standard error (deviations) of b:

 2
 t(Y Ŷ
t
)
S 
b̂ (n  k) (X  X) 2
t
 Regression
Hypothesis testing:
• Involves examining whether an estimated coefficient (such as b̂ )
is statistically different from zero. If different from zero, then the
variable associated affects the dependent variable.
• Estimated coefficient is considered to be different from zero (i.e.
significant) with better evidence only if its t-value falls on the
extreme 5% of its tail (or check the p-value in the last column of
estimation: if p-value is smaller than 0.05, then the coefficient can
be taken different from zero in statistical sense.
• Normally statisticians take p-value <0.1 (as weak evidence), p<0.05
(better evidence) and p<0.01 (strong evidence)
• R2 is a measure of goodness of fit of the regression. It is also the
square of the correlation between Y and Ŷ
• Hypothesis test needed to show whether meaningful relation exists.