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Estimation of the demand function and calculation of optimal prices taking externalities into consideration
Abstract
The purpose of this study is to investigate the effects of consumption externalities with macro reference groups on firms' optimal prices and profits. Our analysis consists of the following three steps: First, using a conjoint analysis data, we construct a hierarchical Bayesian model and derive an individual utility function. Second, we estimate the demand functions when the externalities are present or not. Last, we calculate the profit functions and derive the optimal prices with and without externalities. Applying our method to the book market of Japan, it is found that the optimal price is lower when externality is present than when absent. This is why pricing low and selling a large number of books from an early stage increase the externality effect, yielding the higher profit.
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Choice decisions in the marketplace are often made by a collection of individuals or a group. Examples include purchase decisions involving families and organizations. A particularly unique aspect of a joint choice is that the group's preference is very likely to diverge from preferences of the individuals that constitute the group. For a marketing researcher, the biggest hurdle in measuring group preference is that it is often infeasible or cost prohibitive to collect data at the group level. Our objective in this research is to propose a novel methodology to estimate joint preference without the need to collect joint data from the group members. Our methodology makes use of both stated and inferred preference measures, and merges experimental design, statistical modeling, and utility aggregation theories to capture the psychological processes of preference revision and concession that lead to the joint preference. Results based on a study involving a cell phone purchase for 214 parent-teen dyads demonstrate predictive validity of our proposed method.
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