Demand Estimation

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.
Copyright 2007 by Oxford University Press, Inc.
Slide 1
Slide 2
Marketing Research Approaches to Demand Estimation

Consumer Surveys
data from survey questions
Observational Research
data from observed behavior
Consumer Clinics
data from laboratory experiments
Market Experiments
data from real market tests
Slide 3
Slide 4
Slide 5
Regression Analysis
Year 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
Slide 6
Scatter Diagram
Slide 7
Regression Analysis
Regression Line: Line of Best Fit
Regression Line: Minimizes the sum of the squared vertical deviations (et) of each point from the regression line. Ordinary Least Squares (OLS) Method
Slide 8
Slide 9
Ordinary Least Squares (OLS)

Model:
Yt a bX t et
Yt a bX t et Yt Yt
Slide 10

Objective: Determine the slope and intercept that minimize the sum of the squared errors.
et2 (Yt Yt ) 2 (Yt a bX t ) 2
t 1 t 1 t 1 n n n
Slide 11

Estimation Procedure
(X
t 1 n t 1
X )(Yt Y )
t
(X
a Y bX
X)
Slide 12

Estimation Example
Time
1 2 3 4 5 6 7 8 9 10
n
Xt
10 9 11 12 11 12 13 13 14 15 120
Yt
44 40 42 46 48 52 54 58 56 60 500
Xt X
-2 -3 -1 0 -1 0 1 1 2 3
n
Yt Y
-6 -10 -8 -4 -2 2 4 8 6 10
( X t X )(Yt Y )
12 30 8 0 2 0 4 8 12 30 106
( X t X )2
4 9 1 0 1 0 1 1 4 9 30
n 10
X
t 1 n
X t 120
t 1
Yt 500
t 1
(X
t 1 n
X ) 2 30 X )(Yt Y ) 106
106 3.533 b 30
a 50 (3.533)(12) 7.60
X t 120 12 n 10
Yt 500 50 10 t 1 n
(X
t 1
Slide 13

Estimation Example
n 10
X
t 1 n n
X t 120 12 n 10
X
t 1
120
2
Y
t 1
500
Yt 500 50 10 t 1 n
(X
t 1 n
X ) 30 X )(Yt Y ) 106
106 3.533 b 30
(X
t 1
a 50 (3.533)(12) 7.60
Slide 14
Tests of Significance
Standard Error of the Slope Estimate
(Yt Y ) 2 et2
sb
(n k ) ( X t X )
(n k ) ( X t X ) 2
Slide 15
Example Calculation
Time
1 2 3 4 5 6 7 8 9 10
Xt
10 9 11 12 11 12 13 13 14 15
Yt
44 40 42 46 48 52 54 58 56 60
Yt
42.90 39.37 46.43 49.96 46.43 49.96 53.49 53.49 57.02 60.55
et Yt Yt
1.10 0.63 -4.43 -3.96 1.57 2.04 0.51 4.51 -1.02 -0.55
et2 (Yt Yt )2
1.2100 0.3969 19.6249 15.6816 2.4649 4.1616 0.2601 20.3401 1.0404 0.3025 65.4830
( X t X )2
4 9 1 0 1 0 1 1 4 9 30
e (Yt Yt )2 65.4830
t 1 2 t t 1
(X
t 1
X ) 30
2
sb
(Y Y ) ( n k ) ( X X )
2 t t
65.4830 0.52 (10 2)(30)

Slide 16
Example Calculation
et2 (Yt Yt ) 2 65.4830
t 1 t 1 n n
( X t X ) 2 30
t 1
65.4830 sb 0.52 2 ( n k ) ( X t X ) (10 2)(30)

)2 (Yt Y
Slide 17
Calculation of the t Statistic
b 3.53 t 6.79 sb 0.52
Degrees of Freedom = (n-k) = (10-2) = 8
Critical Value at 5% level =2.306

Slide 18
Decomposition of Sum of Squares
Total Variation = Explained Variation + Unexplained Variation
Y )2 (Y Y )2 (Yt Y ) (Y t t
2
Slide 19
Slide 20
Coefficient of Determination
R2 Explained Variation TotalVariation (Yt Y )2 (Y Y )2
373.84 R 0.85 440.00

2
Slide 21
Slide 22
Coefficient of Correlation
r R2 withthe signof b
1 r 1
r 0.85 0.92
Slide 23
Multiple Regression Analysis
Model:
Y a b1 X 1 b2 X 2
bk ' X k '
Slide 24
Slide 25
Slide 26

Adjusted Coefficient of Determination
(n 1) (n k )
R 2 1 (1 R 2 )
Slide 27

Analysis of Variance and F Statistic
Explained Variation /(k 1) F Unexplained Variation /(n k )
R 2 /( k 1) F (1 R 2 ) /( n k )
Slide 28
Problems in Regression Analysis

Multicollinearity: Two or more explanatory variables are highly correlated. Heteroskedasticity: Variance of error term is not independent of the Y variable. Autocorrelation: Consecutive error terms are correlated.
Slide 29
Slide 30
Durbin-Watson Statistic
Test for Autocorrelation
(et et 1 ) 2
t 2 n
et2
t 1
If d = 2, autocorrelation is absent.
Slide 31
Steps in Demand Estimation

Model Specification: Identify Variables Collect Data Specify Functional Form Estimate Function Test the Results
Slide 32
Functional Form Specifications

Linear Function:
QX a0 a1 PX a2 I a3 N a4 PY e
Power Function:
b QX a ( PX1 )( PYb2 )
Estimation Format:
ln QX ln a b1 ln PX b2 ln P Y
Slide 33
Slide 34
Slide 35
Slide 36
Chapter 4 Appendix
Slide 37
Slide 38
Slide 39
Slide 40
Getting Started
Install the Analysis ToolPak add-in from the Excel installation media if it has not already been installed Attach the Analysis ToolPak add-in
From the menu, select Tools and then Add-Ins... When the Add-Ins dialog appears, select Analysis ToolPak and then click OK.
Slide 41
Slide 42
Entering Data
Data on each variable must be entered in a separate column Label the top of each column with a symbol or brief description to identify the variable Multiple regression analysis requires that all data on independent variables be in adjacent columns
Slide 43
Example Data
Slide 44
Running the Regression

Select the Regression tool from the Analysis ToolPak dialog
From the menu, select Tools and then Data Analysis... On the Data Analysis dialog, scroll down the list of Analysis Tools, select Regression, and then click OK The Regression tool dialog will then be displayed
Slide 45
Slide 46
Slide 47
Select the Data Ranges

Type in the data range for the Y variable or select the range on the worksheet Type in the data range for the X variable(s) or select the range on the worksheet If your ranges include the data labels (recommended) then check the labels option
Slide 48
Slide 49
Select an Output Option

Output to a selected range
Selection is the upper left corner of the output range
Output to a new worksheet

Optionally enter a name for the worksheet
Output to a new workbook And then click OK

Slide 50
Slide 51
Regression Output
Slide 52
Multiple Regression Data
Slide 53
Slide 54
Regression Output
Slide 55

Demand Estimation

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PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright 2007 by Oxford University Press, Inc.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright 2007 by Oxford University Press, Inc.

Marketing Research Approaches to Demand Estimation

Copyright 2007 by Oxford University Press, Inc.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright 2007 by Oxford University Press, Inc.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright 2007 by Oxford University Press, Inc.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright 2007 by Oxford University Press, Inc.

Copyright 2007 by Oxford University Press, Inc.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright 2007 by Oxford University Press, Inc.

Ordinary Least Squares (OLS)

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright 2007 by Oxford University Press, Inc.

Ordinary Least Squares (OLS)

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright 2007 by Oxford University Press, Inc.

Ordinary Least Squares (OLS)

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright 2007 by Oxford University Press, Inc.

Ordinary Least Squares (OLS)

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright 2007 by Oxford University Press, Inc.

Ordinary Least Squares (OLS)

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright 2007 by Oxford University Press, Inc.

65.4830 0.52 (10 2)(30)

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright 2007 by Oxford University Press, Inc.

65.4830 sb 0.52 2 ( n k ) ( X t X ) (10 2)(30)

Copyright 2007 by Oxford University Press, Inc.

Degrees of Freedom = (n-k) = (10-2) = 8

Critical Value at 5% level =2.306

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright 2007 by Oxford University Press, Inc.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright 2007 by Oxford University Press, Inc.

373.84 R 0.85 440.00

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright 2007 by Oxford University Press, Inc.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright 2007 by Oxford University Press, Inc.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright 2007 by Oxford University Press, Inc.

Multiple Regression Analysis

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright 2007 by Oxford University Press, Inc.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright 2007 by Oxford University Press, Inc.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright 2007 by Oxford University Press, Inc.

Multiple Regression Analysis

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright 2007 by Oxford University Press, Inc.

Multiple Regression Analysis

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright 2007 by Oxford University Press, Inc.