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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. 2. 3. 4. Consumer surveys and Observational Research Consumer clinics, and Market experiments. 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 tried to 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

Notes on Managerial economics 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

Notes on Managerial economics By Fiaz Ahmed

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

Notes on Managerial economics By Fiaz Ahmed

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 under estimation. 2.Collection of historical data on all the relevant variables 3.Choosing an appropriate from for the function. 4.Estimation of the function Speci0fication of casual variables comes from the underlying economic theory of demand. For example, 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 vanaspati ghee 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 by several other variables also, such as consumers tastes and preferences, distribution of population into rich and poor or between South Indian and North Indian and consumers expectations about future price of ground nut oil. However, one should note that a model is a simplified version of a true structure, and the model builder faces a lot of constraints such as availability of data costs of their collection and time constraints within which one would like to complete the work demand of demand estimation. For these reasons, a model builder might be content with the important causal variables only.