Estimation of an implied price elasticity of demand through current pricing practices

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Abstract:

Researchers have long pursued better methods to estimate price elasticity of market-level demand. Due to a plethora of empirical problems, the estimates produced in many empirical studies leave researchers with wide confidence intervals that do little to clarify demand conditions. As a result, these estimates are of limited practical use to the firm facing a firm-level demand. Here, a non-statistical methodology based on seller optimization behaviour is applied that creates an ‘implied elasticity' of firm-level demand that is robust, intuitively plausible and free of oppressive data requirements. These elasticities are tested in an applied setting against pricing managers' surveyed estimates for customer price sensitivity for freight rail transportation services and it is found that the estimate is consistent with their pricing behaviour. This methodology is recommended for creating a simple, plausible starting point estimate for firm-level price elasticities, or using this calculation as an input to statistical studies.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840500091969

Affiliations: University of Dayton, School of Business, 300 College Park, Dayton, OH 45469, USA, Email: michael.gorman@udayton.edu

Publication date: May 20, 2005

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