Cura, Rica Joy B.

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Empirical Measurement of Price-Change Response

Regression Approach

 The Regression Approach to predicting the market’s price-change involves

systematically examining the product’s price specifically, the product’s past prices and
past sales levels to determine the degree of correspondence.
 Would be relatively simple if price were the only variable affecting the sales level but
non-price variables must be taken into account and makes use of “Time-series
Regression”.

Data required for the Regression Approach

 It is necessary to base the analysis on a rectangular array of numbers, or data

matrix:
 Each row equals data from a particular period of time.
 Each column contains a variable in the analysis

The dependent variable is sales level, while all others are independent variables. To be useful, a
data must:

 Include data from a sufficiently large number of time periods.

 Have sufficient variation in the price variable over the time span of the analysis
 Have sufficient independence between price and other independent variables that affect
sales.

Sample Data Matrix:

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The Regression Coefficient of the price variable:

 The sales variable would be considered as a linear combination of price and the other
independent variable in the analysis.

Sales = a + b1 (month) + b2 (price) + b3 (unit sales or Adv$)

 B1, B2 and B3 are known regression coefficients, the expected change in dependent
variable when the independent is changed by one unit , holding constant the effect of
other effect of the other independents.

Sample data Matrix:

 The output of this analysis is shown in Figure. The positive sign indicates that sales
tended to increase as the months approached the busy winter holiday season. Over this
three-year period, every $1 increase in price corresponded to a 57,343 unit decrease in
sales. This indicates that the effects of at least some of our IVs are reliable with respect to
random error. The regression analysis indicates that Sales increased with increases in the
amount spent on product advertising..

Calculating the Price Elasticity From a Price Coefficient

 Price elasticity is the prediction of the market's price change response that could be
obtained from the regression approach. Given this product's history, our best guess would
be that the market would be only moderately responsive to a price change.

Formula

E = Regression coefficient of price variable × (Pm/ Sm)

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Experimentation Approach

 Experimentation can be used to predict the market's price-change response. It involves

establishing two or more customer groups that are equivalent. The product's price is then
varied between these equivalent groups and responses of the customers measured.

Example data:

Designing a Controlled Experiment

 Creating two equivalent groups of customers

 Arrange to change something in one of the two equivalent groups
 Arrange to measure both groups after the change in the test group has occurred

Calculating the Price Elasticity From a Sales Experiment

 Calculating the price change and the sales change that resulted from the price change.
 Convert both this price change and sales change into percents
 Divide the two percents

Note: When converting the price change and resulting sales change into percents, the price and
sales levels in the control group should be used as the base values.

 For example, to calculate a price elasticity from the results of the experiment shown in
example data, we would first calculate the percent price change:
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 Next, we would calculate the percent by which sales changed in response to the price
change:

 Finally, we would divide the percent sales change by the percent price change to arrive at
the price elasticity that would be indicated by this experiment:

 This price elasticity would to some degree increase the generality of the experimental
results. The experimental price manipulation was a price decrease, one should hesitate in
using its results to predict the market response to a price increase. If a price increase is
being considered, then the experimental manipulation should be a price increase

Summary:

 The Regression approach requires a data matrix where each row consists of a period of
time and each column consists of the values of a dependent variable or independent
variable
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 The Experimentation approach typically requires two equivalent customer groups: (1) a
test group and (2) a control group. Price is changed in only one group (the test group),
and then the level of sales in the test and control groups are compared