lecture 6 Response models and elasticities

Question 1

Relevance of sales response models

Answer 1

looking for the relationship between advertising and sales is somewhat worse than looking for a needle in a haystack

Business managers need to know how markets respond to the actions they take

One of the primary goalds of marketing science is to provide a structural insight of how a brand generates its sales, market share, customer awareness or any other variable of interest

Question 2

Sales response model

Answer 2

Model: is a generally simplified mathematical representation of real world relations

Sales response: is the rate at which sales change as a result of changes in business activity

Sales response models: try to model a sales response as a function of business activities

Question 3

markets data and variables

Answer 3

before modeling a response function, the level of analysis should reflect the heterogeneous nature of a market

The firm conducts certain business activities and communicates with consumers through market activities and price settings. The customers respont to actions and inform company about needs, and based off those needs the company provides products and services. As a reaction customers produces sales for the firm as a reaction.

Question 4

Internal data

Answer 4

data comes from company itself

Advantage: usually readily available, intra-daily basis, accurate and quick

Disadvantages:
Only from company itself - no competitors, no information about psychographics, no information about time of decision

Question 5

Household scanner data

Answer 5

data coming from retail upc scanners or from company itself

Advantages: available for all major retail chains, available on a daily basis

Disadvantages:
Sampling frame (only “shops”), small shops may not be considered, no information about psychographics, no information about time of decision

Question 6

Annual reports (e.g. compustat)

Answer 6

data coming from annual reports of companies

Advantages: available for all companies that are listed on a stock market

Disadvantage:
Data is only available on a yearly (or quarterly) basis, non-traded companies are not considered, no information about psycholgraphics, no information about time of decision

Question 7

Sales response model

Answer 7

capture the factors that drive the market

sales = f(1) (quality, price, advertising…(2)

1) what are the relevant sales drivers

2) what functional form appropriately represents the manner in which the drivers exert their effect

Question 8

overview of the types of static sales response models

Answer 8

1) connstant marginal returns (linear)

2) decreasing marginal returns (multiplicative model, semi-logarithmic model)

3) Saturation volume (modified exponential model)

4) S-shaped (log-reciprocal model, logistic model

5) market share model (multiplicative interaction model (MCI), multinominal logit model (MNL))

Question 9

constant marginal returns
Linear regression

Answer 9

Objective of regression analysis:
quantification of the slope of a regression line

Estimation of the influence of one variable (X) on another variable (Y)

R^2 expresses the proportion of the explained variance in the dependent variable (Y) that is explained by the regression ine (value range: 0 to 1)

Linear models assume constant returns to scale

This means that each additional unit in some X (advertising) will lead to an equal incremental change in Y (Sales)

Question 10

Elasticity

Answer 10

e = dQ/dp * p/Q = deltaQ(%)/deltap(%)

The price elasticity of demand tells us how sensitive peoples purchases are of a product to changes in the price of the product

Question 11

income elasticity of demand

Answer 11

how sensitive peoples purchases of a product are in response to changes in their incomes

Question 12

if your income rises by 10% you consume 15% more music, 10% more pizza and 5% less ramen noodles what does this make these products

Answer 12

music = superior

pizza = normal

Ramen noodles = inferior

Question 13

absolute effect

Answer 13

change in sales / change in advertising euro

==

sales now - sales before / detailing eur now - detailing eur before

Question 14

Relative effect (elasticity)

Answer 14

change in sales %/ advertising eur in %

==

(salesnow - salesbefore/sales before )/Detailing eur now - detailing eur before /detailing eur before)

Question 15

Multiplicative model

Answer 15

Q = a0 *x1^a1 *eû

Ex = a1

Question 16

Semi-logarithmic model

Answer 16

Q = a0 + a1lnx + u

Ex= a1/Q