Challenges in Estimating Demand Plasticity

1
Challenges in Estimating Demand Plasticity

• Dawit Mulugeta
• Merchandising
• AutoZone
• Manager, Merchandising Analysis

2
Elasticity - Definition

• Responsiveness of demand to price change
• Change in Demand / Change in Price

• Demand Curve assume different shapes

3
Elasticity - Estimation using SAS

• Point Estimate - SAS data step
• Linear regression
• Linear (Least Square Regression)
• Estimate model coefficients - dependent variable
  is demand (D),
• Independent variables price, lookup, demography,
  Y a bX e
• F-Statistics, P-values, t-statistics, R2,
• SAS Procedures Reg, Mixed, Autoreg, Glm,
• Nonlinear regression
• Variable reduction, parameter setup, estimation
• SAS Procedures Model, Logistic, Genmod, Phreg,

4
Elasticity Point Estimate - SAS Data Step

• Change in D / Change in P

(D2-D1)/((D2D1)/2) (P2-P1)/((P2P1)/2)
E

• ELASTIC D and P change in opposite direction and
  E
• INELASTIC D and P change in same direction and E
  -1

5
Elasticity Point Estimate SAS Data Step
-Results of a study consisting 60 product groups

• Vary greatly across products
• Lots of Positive values - Players other than
  pricing

6
Elasticity SAS Procedures - Results of a Study

• The study had 6770 SKUS, and had three Steps
• Extract / prepare data (bulk of the work)
• Estimate coeff using SAS Autoreg / Mixed
  procedures
• Characterize and classify items based on
  estimates

• Step 1 Extract / prepare data (bulk of the work)

7
Elasticity SAS Procedures - Results of a Study

• Step 2 Get coeff using SAS Autoreg / Mixed
  procedures

8
Elasticity SAS Procedures - Results of a Study
Step 3 Characterize items based on model
estimates