University:
Massachusetts Institute of Technology
Course:
15.501/516 | Accounting
Academic year:

2023
Views:

471

Pages:

8
Author:

strengistrep

Overview: Demand • Demand for Anti-Ulcer Drugs – Data, Estimation – Interpretation of Empirical Results • Modeling of Consumer Choice Demand Analysis • Today – Empirical Demand Analysis – Modeling of Consumer Demand • Later – – – – Demand and Product Characteristics Discrete Choice Models Network Effects Dynamic Adjustments in Demand 1 Market Demand for Anti Ulcer Drugs • Typical Empirical Application – Rapid Growth Market – Changes in Market Structure • Focus on Price Effects and Advertising Effects – Price Elasticity and Advertising Elasticity • Example of Practical Modeling Considerations Market Demand for Anti-Ulcer Drugs • Monthly Observations, Aug. 1977 - May 1993 • Four Drugs: Tagamet, Axid, Pepcid, Zantac Prescription (prior to OTC versions) • Variables LQ - Log (Market Quantity) LP - Log (Market Price) LADV - Log (Cumulative Advertising) T - Time Trend • Data Source: Berndt, Bui, Reiley and Urban (1994) 2 Market Demand for Anti-Ulcer Drugs • Model is of the Form: LQ = α + ElasP LP + ElasADV LADV + τ T + ε • Basic Estimates LQ = -10.04 - 1.16 LP + .88 LADV + .001 T + ε • Namely ElasP = −1.16, ElasADV = .88 (Not bad!) • But…. Model Specification Analysis Yikes!!! Something is wrong!!! • What Could Cause the Residual Pattern? • What should we do about it ??? 3 Introduction of Anti-Ulcer Drugs • Drugs Did Not Appear Simultaneously • Introduction Dates Tagamet (Smith Kline): August 1977 Zantac (Glaxo): June 1983 Pepcid (Merck): October 1986 Axid (Lilly): April 1988 • How is this incorporated? Final Estimation Results • Refined Model is of the Form: LQ = α + ElasP LP + ElasADV LADV + ε where One Drug Two Drugs Three Drugs Four Drugs Elasticities P ADV -1.67 0.77 -0.65 0.4 -0.65 0.4 -0.65 0 4 Retail Pricing and Promotions • Retail pricing involves list prices as well as promotions, or temporary price reductions • Modeling and estimation applied here too, in early growth phase • Household models and targeted couponing 5 Consumer Choice Models • How Do Consumers Make Decisions? • Behavioral Assumption: Consumers Act in Their Best Interests – Interests = “Preferences” or “Utility” – Best Interests = “Maximize Utility” over available choices. • Utility Maximization Choose Quantities of Goods: A, B, .... by maximizing Utility Function U(A,B,...) subject to Budget Constraint: pAA + pBB + ... = I Consumer Choice Models (2) Optimal: MRSAB = pA /pB, etc., namely MUA/pA = MUB/pB = (all goods); “Equal Bang per Buck” Result: Individual Demand Functions A = DA(pA,pB,...,I) B = DB(pA,pB,...,I) Empirical Models Build in Consumer Differences, Demographics, etc. 6 7 Take Away Points • Demand curves are real: they can be estimated! • Estimation involves – Model specification – Estimation – Interpretation and modification • A basic understanding of regression output allows you to critically assess claims based on it. • Utility maximization models are the workhorse of economics and finance, among others 8