EM 2 - Strategies for Assessing and Increasing Demand

Question 1

Surveys

Answer 1

• Cheap to run;
• Large amounts of quantifiable data;
• Essential that questions are framed to be unbiased; and
• Challenge: designing to ask questions that respondents are able to answer willingly and truthfully.

Question 2

Focus groups

Answer 2

• Expensive;
• Requires expertise to run;
• Can follow up and present questions that are complex and require context;
• Provides nuanced, qualitative information; and
• Challenge: choosing the right target sample.

Question 3

Auctions and WTP

Answer 3

Auctions are effective for eliciting a customer’s true WTP because they tie the act of revealing one’s preference for the good to the probability of obtaining it.

Question 4

Types of auctions

Answer 4

• Open outcry/ English: buyers submit increasing bids, buyer with highest WTP wins, typically paying second highest WTP + increment;
• Vickrey (sealed second-price auctions): buyers submit sealed bids, highest bidder wins, pays 2nd highest bid; and
• Sealed first price auctions: buyers submit sealed bids, highest bidder wins, pays what they bid.

Question 5

Revenue Equivalence Result

Answer 5

states that, under certain general conditions, each of these types of auctions should result in approximately the same revenue for the seller.
This revenue will be approximately equal to the 2nd highest bidder’s WTP.

Question 6

Winner’s Curse

Answer 6

When the winner of an auction pays more than the true value of the product - i.e. they overestimated the value of the product.
This typically doesn’t occour when the winner has a sentimental attachment to the product.

Question 7

Revealed preference

Answer 7

Relying on available data of customers past choices, or the choices of potential customers - i.e. they rely on customer actions rather than what customers say.
The main challenge is to ensure that missing variables don’t confound the interpretation.

Question 8

Why randomize when running experiments?

Answer 8

To avoid the problem of missing variables

Question 9

Conjoint Analysis

Answer 9

Specialized survey design with determines consumers preferences for individual attributes of a product.

i. Respondents rank bundles of features;
ii. Assign numerical value called “part-worths”;
iii. Numerical values can use this to determine which features to offer.

Question 10

Types of advertisements

Answer 10

Persuasive or informative.

Forms -

• advertising a specific firm’s product (can shift dd curve to the right);
• Advertising an industry (can shift the entire industry’s dd curve to the right, beneficial when a firm has few or no competitors); or
• Negative advertising against a competitor (can shift the dd curve for the competitors firm to the left, if own product is a substitute can shift dd curve to the right; useful if there is one main competitor).

Question 11

Substitute

Answer 11

Products that can replace each other.
Increase in availability of substitute or drop in price of substitute => dd for own product reduces, i.e. dd curve shifts left.

WTP (A + B) < WTP (A) + WTP (B)

Question 12

Complements

Answer 12

Products that consumers wish to consume together.
Availability of complement increases or price falls => dd for own product increases, i.e. dd curve shifts right.

WTP (A+B) > WTP(A) + WTP (B)

Question 13

Increase dd wrt substitutes and complements

Answer 13

Firms can increase the demand of their own products by:

making substitutes less available or more expensive, and making complements more available or cheaper.

Question 14

Network effects

Answer 14

Happen when a product is more valuable to its users, the more users it has - i.e. an individual’s demand curve shifts right as other users purchase the product.
For these kinds of products, firms can price low or free initially and then raise costs once they have a large base of consumers.

Eg.s - softwares, trading cards, communication systems.