Challenges in Estimating Demand Plasticity Dawit Mulugeta Merchandising AutoZone Manager, Merchandising Analysis

2 Elasticity - Definition Responsiveness of demand to price change % Change in Demand / % Change in Price P Q Demand Curve assume different shapes

3 Point Estimate - SAS data step Linear regression  Linear (Least Square Regression)  Estimate model coefficients - dependent variable is demand (D),  Independent variables: price, lookup, demography, Y = a + bX + e  F-Statistics, P-values, t-statistics, R2,  SAS Procedures: Reg, Mixed, Autoreg, Glm, Nonlinear regression  Variable reduction, parameter setup, estimation  SAS Procedures: Model, Logistic, Genmod, Phreg, Elasticity - Estimation using SAS

4 Elasticity: Point Estimate - SAS Data Step E = (D2-D1)/((D2+D1)/2) (P2-P1)/((P2+P1)/2) ELASTIC: D and P change in opposite direction and E < -1 INELASTIC: D and P change in same direction and E > -1 % Change in D / % Change in P

5 Vary greatly across products Lots of Positive values - Players other than pricing Elasticity: Point Estimate SAS Data Step - Results of a study consisting 60 product groups

6 Elasticity: SAS Procedures - Results of a Study The study had 6770 SKUS, and had three Steps Extract / prepare data (bulk of the work) Estimate coeff using SAS Autoreg / Mixed procedures Characterize and classify items based on estimates Step 1: Extract / prepare data (bulk of the work)

7 Step 2: Get coeff using SAS Autoreg / Mixed procedures Elasticity: SAS Procedures - Results of a Study

8 Step 3: Characterize items based on model estimates