Chapter 4

Demand Estimation

Marketing Research Approaches

Regression Analysis
Simple & Multiple Reg Analysis
Demand Estimation by Reg Analysis

pp. 137-183

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 1

The Identification Problem

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 2

Demand Estimation:
Marketing Research Approaches
Consumer Surveys: questioning people w/ questionnaires + trained
interviewers

p.141

Observational Research: gathering information by watching them

buying products

p. 141

Consumer Clinics: laboratory experiments; participants are given a

sum of money & asked to spend it reaction on changes in price, packaging,

displays, etc p. 142

Market Experiments: conducted in actual market place or several

markets record the responses consumers p. 144

Virtual Shopping: a virtual store stimulated on the computer screen

consumers touch its image (3D modeling) p. 146

Virtual Management: more sophisticated model (2002) using

computational models + data base, econometrics, information technology pp.

73 & 146

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 3

Regression Analysis
Year

10

44

40

11

42

12

46

11

48

12

52

13

54

13

58

14

56

10

15

60

Prepared by Robert F. Brooker, Ph.D.

Scatter Diagram

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 4

Regression Analysis
Regression Line: Line of Best Fit
Regression Line: Minimizes the sum of
the squared vertical deviations (e t) of
each point from the regression line.
Ordinary Least Squares (OLS) Method
Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 5

Regression Analysis

Yt a bX
t
a 50 (3.533)(12) 7.60
106
b
3.533
30
= expected value

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 6

Ordinary Least Squares (OLS)

Model:

Yt a bX t et

Yt a bX
t
et Yt Yt

= expected value

et = Vertical deviation/
Residual/error

p.149

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 7

Ordinary Least Squares (OLS)

Objective: Determine the slope and
intercept that minimize the sum of
the squared errors.
n

t 1

t 1

t 1

2
2
)2

(
Y

Y
)

(
Y

bX
t t t t
t

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 8

Ordinary Least Squares (OLS)

Estimation Procedure
n

(X
t 1

X )(Yt Y )

2
(
X

X
)
t

a Y bX

t 1

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 9

Ordinary Least Squares (OLS)

Estimation Example
Time

Xt

1
2
3
4
5
6
7
8
9
10

10
9
11
12
11
12
13
13
14
15
120

n 10

Yt
44
40
42
46
48
52
54
58
56
60
500

X t 120

Yt 500

t 1

X
t 1

X t 120

12
n
10

t 1

Yt 500

50
10
t 1 n

Prepared by Robert F. Brooker, Ph.D.

Xt X

Yt Y

-2
-3
-1
0
-1
0
1
1
2
3

-6
-10
-8
-4
-2
2
4
8
6
10
n

(X
t 1

t 1

( X t X )2

12
30
8
0
2
0
4
8
12
30
106

4
9
1
0
1
0
1
1
4
9
30

X ) 2 30

106
b
3.533
30

X )(Yt Y ) 106

a 50 (3.533)(12) 7.60

(X

( X t X )(Yt Y )

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 10

Ordinary Least Squares (OLS)

Estimation Example
n

n 10
n

X
t 1

120

t 1

Y
t 1

500

2
(
X

X
)
30
t
t 1
n

(X
t 1

X )(Yt Y ) 106

Prepared by Robert F. Brooker, Ph.D.

X t 120

12
n
10

Yt 500

50
10
t 1 n

106

b
3.533
30

a 50 (3.533)(12) 7.60

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 11

Tests of Significance
Standard Error of the Slope Estimate

sb

(Yt Y )

(n k ) ( X t X )

e
(n k ) ( X
2
t

X
)
t

(n k) = degree of freedom
n = 10; k = 2 (= parameters and b)
df = 10 2 = 8
Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 12

Tests of Significance
Example Calculation
Yt

et Yt Yt

et2 (Yt Yt ) 2

( X t X )2

44

42.90

1.10

1.2100

40

39.37

0.63

0.3969

11

42

46.43

-4.43

19.6249

12

46

49.96

-3.96

15.6816

11

48

46.43

1.57

2.4649

12

52

49.96

2.04

4.1616

13

54

53.49

0.51

0.2601

13

58

53.49

4.51

20.3401

14

56

57.02

-1.02

1.0404

10

15

60

60.55

-0.55

0.3025

65.4830

30

Time

Xt

Yt

10

e (Yt Yt )2 65.4830
t 1

2
t

t 1

Prepared by Robert F. Brooker, Ph.D.

(X
t 1

(Y Y )
( n k ) ( X X )
2

X ) 30
2

sb

65.4830
0.52
(10 2)(30)

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 13

Tests of Significance
Example Calculation
n

t 1

t 1

2
2

(
Y

Y
)
t t t 65.4830
n

2
(
X

X
)
30
t
t 1

(Yt Y )

65.4830
sb

0.52
2
(n k ) ( X t X )
(10 2)(30)
Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 14

Tests of Significance
Calculation of the t Statistic
ted
a
l
u
c
al
t=c
e
valu

b 3.53
t
6.79
sb 0.52

ters
e
m
a
r
a
2p

Degrees of Freedom = (n-k) = (10-2) = 8

r va
tabula

lue

Critical Value at 5% level =2.306

6.79 > 2.306 a significant relationship between X and Y

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 15

Tests of Significance
Decomposition of Sum of Squares
Total Variation = Explained Variation + Unexplained Variation

2
2

(Yt Y ) (Y Y ) (Yt Yt )
2

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 16

Tests of Significance
Decomposition of Sum of Squares

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 17

Tests of Significance
Coefficient of Determination
R2

2
(
Y

Y
)
t

373.84
0.85
440.00

R = 0 to 1
R = 0 (none of variation of Y
were explained by the
variation in X)
85% of the total variation in the firms sales
is accounted for the variation in the firms
Advertising expenditures

R2

p. 157

Explained Variation

TotalVariation

(
Y

Y
)

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 18

Tests of Significance
Coefficient of Correlation
r R 2 with the sign of b
1 r 1
r 0.85 0.92
r = 92% means that variables X and Y vary together 92% of the time.
If r = -1 all the sample observation points fall on a negatively sloped straight
line the sign of r is always the same as the sign of b^ (the estimated slope of
coefficient)

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 19

Multiple Regression Analysis

Model:

Y a b1 X 1 b2 X 2 L bk ' X k '

Adjusted Coefficient of Determination

(n 1)
R 1 (1 R )
(n k )
2

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 20

Multiple Regression Analysis

Analysis of Variance and F Statistic
Explained Variation /(k 1)
F
Unexplained Variation /(n k )

R 2 /(k 1)
F
= 46.61
2
(1 R ) /( n k )

pp. 161-164; Table 4.7

Calculated value F = 46.61 (F statistic) is greater than critical value in the table of
F distribution (Appendix C) = 4.74 significant relationship

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 21

See: pp 165-168

Problems in Regression Analysis

Multicollinearity: Two or more
explanatory variables are highly
correlated insignificant even though R very high
Heteroskedasticity: Variance of error
term is not independent of the Y variable:
e as X

e should be constant p. 166

Autocorrelation: Consecutive error/

residual terms are correlated: time series datamissing variable

Durbin Watson test

Prepared by Robert F. Brooker, Ph.D.

p. 166-167

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 22

Durbin-Watson Statistic
Test for Autocorrelation
n

2
(
e

e
)
t t 1
t 2

p.167

2
e
t
t 1

If d = 2, autocorrelation is absent.

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 23

Steps in Demand Estimation

Model Specification: Identify Variables

Collect Data
Specify Functional Form
Estimate Function
Test the Results

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 24

Functional Form Specifications

Linear Function:
QX a0 a1 PX a2 I a3 N a4 PY L e

Power Function:
QX a( PXb1 )( PYb2 )

Prepared by Robert F. Brooker, Ph.D.

Estimation Format:
ln QX ln a b1 ln PX b2 ln PY

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 25

Contoh 1:
Hubungan tabungan (S), neraca perdagangan
(TB), pinjaman luar negeri (F) terhadap
pertumbuhan (g):
g = 2,929 + 0,02996 S - 0,0312 TB - 0,287 F
(0,939)
(-1,453)
(-4,959)

F = 21,745

Prepared by Robert F. Brooker, Ph.D.

R = 0,916

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 26

Contoh 2:

HASIL ESTIMASI
Persamaan dari Taylor type rule

it = 18,926 + 0,39 t 1,476 yt 0,14et + 0.099et-1

(2,092) (-3,586) (-1,546)
(1,024)
R2 = 0,552
F = 6,784
DW = 0.423963

Prepared by Robert F. Brooker, Ph.D.

it

= tingkat bunga jangka pendek yang digunakan

oleh bank sentral
t
= laju inflasi tahun t
yt
= pertumbuhan PDB tahun t
et
= nilai tukar riil pada tahun t
et-1
= nilai tukar riil pada tahun t-1
f dan g
= koefisien bentuk dasar dari Taylor type rule
h0 dan h1 = koefisien dari nilai tukar riil yang menjadi
pengembangan dari Taylor type rule

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 27