"DIFFERENT METHODS OF ESTIMATING PRICE ELASTICITY-AN ILLUSTRATION"

"DIFFERENT METHODS OF ESTIMATING PRICE ELASTICITY-AN ILLUSTRATION"

Different techniques have evolved for estimating price elasticity.Consider the following case:

"A bell telephone company was considering offering a rate reduction on second phones,which installed for an extra monthly  charge of sevent-five cents.The company had been using heavy advertising to sell families on second phones,but the advertising was begining to show diminishing returns.The company wondered how many addditional extension phones would if the monthly was lowered  charge was lowered to fifty cents"

The company could estimate the likely reactions of the ultimate customers, using one of four methods:

1).Direct-attitude survey

The company could ask potential whether they woul add another phone if the monthly service charge wasn lowered to fifity cents.The percentage saying yes could be applied against the number of the pottential users to calculate the number of extra extensions.

2).Statistical analysis

This could take the forms of historical or a cross-sectional analysis of the relationship between price and quantity.A historical analysis consists in observing how extension usage was affected by past rate reductions.A cross-sectional analysis consists in observing how extensions usage varies with teh rates charged by different Bell Companies.

3).Market test 

The company could offer potential users a chance to have an extension phone for fifty cents a month if they acted within a specified time period.The percentage who took advantage of the offer could then be multiplied by the number of potential users.

4).Analytic inference

The company could conjecture how many additional families would find a second phone worthwhile at the lower price.A second phone adds convenience at a cost.The company could segment the market into different-size dwelling units and income levels.A high-income family in a large home would be highly interested in a second phone.The company could estimate how many families in this segment lacked  a second phones and apply the probability that they would acquire the phone at the reduce rate.This could be done for all the segments, to build up an estimate.