Estimating Demand Curves

Companies can use one of three basic methods to estimate their demand curves. The first involves statistically analyzing past prices, quantities sold, and other factors to estimate their relationships. However, building a model and fitting the data with the proper techniques calls for considerable skill.

The second approach is to conduct price experiments, as when Bennett and Wilkinson systematically varied the prices of several products sold in a discount store and observed the results.5 An alternative here is to charge different prices in similar territories to see how sales are affected.

The third approach is to ask buyers to state how many units they would buy at different proposed prices.6 One problem with this method is that buyers might understate their purchase intentions at higher prices to discourage the company from setting higher prices.

In measuring the price-demand relationship, the marketer must control for various factors that will influence demand, such as competitive response. Also, if the company changes other marketing-mix factors besides price, the effect of the price change itself will be hard to isolate.7

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