1 Notes on Managerial economics

By Fiaz Ahmed
Market Research Approaches To Demand Estimation
Many market research approaches are used for estimation of demand. Following are the most
important of these.
1. Consumer surveys and Observational Research
2. Consumer clinics, and
3. Market experiments.
Here we briefly examine these methods and point out their advantages and disadvantages and
the conditions under which they might he useful to managers and economists.
1. Consumer Surveys and Observational Research
Consumer surveys involve questioning a sample of consumers about how they would respond to
particular changes in the price of the commodity, incomes, the price of related commodities,
advertising expenditures, credit incentives and other determinants of demand. These surveys can
be conducted by simply stopping and questioning people at a shopping center or by administering
sophisticated questionnaires to a carefully constructed representative sample of consumers by
trained interviewers.
In theory, consumer questionnaires can provide a great deal of useful information to the firm. In
fact, they are often very biased because consumers are either unable or unwilling to provide
accurate answers. For example, do you know how much your monthly butter consumption would
change if the price of butter rose by 10 cents per 100 gms.? If a butter producer doubled its
advertising expenditures? If the fat content of butter were reduced by 1 percent? Even if you tried
to answer these questions as accurately as possible, your reaction might be entirely different if
actually faced with any of the above situations. Sometimes consumers provide a response that
they deem more socially acceptable rather than disclose their true preferences.
Depending on the size of the sample and the elaborateness of the analysis, consumer surveys
can also be expensive.
Because of the shortcomings of consumer surveys, many firms are supplementing or
supplanting consumer surveys with observational research. This refers to the gathering of
information on consumer preferences by watching them buying and using products. For example,
observational research has led some automakers to conclude that many people think of their cars
as art objects that are on display whenever they drive them.
Observational research does not, however, render consumer surveys useless. Sometimes
consumer surveys are the only way to obtain information about possible consumers' responses.
For example, if a firm is thinking of introducing a new product or changing the quality of an existing
one, the only way that the firm can test consumers' reactions is to directly ask them since no other
data are available. From the survey, the researcher then typically tries to determine the
demographic characteristics (age, sex, education, income, family size) of consumers who are
most likely to purchase the product. The same may be true in detecting changes in consumer
tastes and preferences and in determining consumers' expectations about future prices and
business conditions. Consumer surveys can also be useful in detecting consumers' awareness of
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By Fiaz Ahmed
an advertising campaign by the firm. Furthermore, if the survey shows that consumers arc
unaware of price differences between the firm's product and competitive products, this may be a
good indication that the demand for the firm's product is price inelastic.
2. Consumer Clinics
Another approach to demand estimation is consumer clinics. These are laboratory experiments
in which the participants are given a sum of money and asked (to spend it in a simulated store to
see how they react to changes in the commodity price, product packaging, displays, price of
competing products, and other factors affecting demand. Participants in the experiment can be
selected so as to closely represent the socioeconomic characteristics of the market of interest.
Participants have an incentive to purchase the commodities they want the most.
The, consumer clinics are more realistic than consumer surveys. By being able to control the
environment, consumer clinics also avoid the pitfall of actual market experiments which can be
ruined by extraneous events.
Consumer clinics also have serious shortcomings, however. First, the results are questionable
because participants know that they are in an artificial situation and that they are being observed.
Therefore, they are not very likely to act normally, as they would in a real market situation. For
example, suspecting that the researchers might be interested in their reaction to price changes,
participants are likely to show more sensitivity to price changes than in their everyday shopping.
Second, the sample of participants must necessarily be small because of the high cost of running
the experiment. Inferring, however, a market behavior from the results of an experiment based on
a very small sample can be dangerous. Despite these disadvantages, consumer clinics can
provide useful information about the demand for the firm's product, particularly if consumer clinics
are supplemented with consumer surveys.
Market Experiments
Unlike consumer clinics, which are conducted under strict laboratory conditions, market
experiments are conducted in the actual marketplace. There are many different ways of
performing market experiments. One method is to select several markets with similar
socioeconomic characteristics, and change the commodity price in some markets or stores,
packaging in other markets or stores, and the amount and type of promotion in still other markets
or stores, and record the different responses (purchases) of consumers in the different markets.
By using census data or surveys for various markets, a firm can also determine the effect of age,
sex, level of education, income, family size, etc., on the demand for the commodity. Alternatively,
the firm could change, one at a time, each of the determinants of demand under its control in a
particular market over time and record consumers' responses.
The advantage of market experiments is that they can be conducted on a large scale to ensure
the validity of the results and consumers are not aware that they are part of an experiment. Market
experiments also have serious disadvantages, however One of these is that in order to keep costs
down, the experiment is likely to be conducted on too limited a scale and over a fairly short period
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By Fiaz Ahmed
of time, so that inferences about the entire market and for a more extended period of time are
questionable. 'Extraneous occurrences, such as a strike or unusually bad weather, may seriously
bias the results in uncontrolled experiments. Competitors could try to sabotage the experiment by
also changing prices and other determinants of demand under their control. They could also
monitor the experiment and gain very useful information that the firm would prefer not to disclose.
Finally, a firm may permanently lose customers in the process of raising prices in the market
where it is experimenting with a high price.
Despite these shortcomings, market experiments may be very useful to a firm in determining
its best pricing strategy and in testing different packaging, promotional campaigns, and product
qualities. Market experiments are particularly useful in the process of introducing a different
product, where no other data exist. They may also be very useful in verifying the results of other
statistical techniques used to estimate demand and in providing some of the data required for
these other statistical techniques of demand estimation.