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

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  • Michael Gorman

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.

Suggested Citation

  • Michael Gorman, 2005. "Estimation of an implied price elasticity of demand through current pricing practices," Applied Economics, Taylor & Francis Journals, vol. 37(9), pages 1027-1035.
    • Handle: RePEc:taf:applec:v:37:y:2005:i:9:p:1027-1035
    DOI: 10.1080/00036840500091969
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    References listed on IDEAS

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    1. Kenneth Clements & Wana Yang & Dongling Chen, 2001. "The matrix approach to evaluating demand equations," Applied Economics, Taylor & Francis Journals, vol. 33(8), pages 957-967.
    2. Kremers, Hans & Nijkamp, Peter & Rietveld, Piet, 2002. "A meta-analysis of price elasticities of transport demand in a general equilibrium framework," Economic Modelling, Elsevier, vol. 19(3), pages 463-485, May.
    3. Michael F. Gorman, 2001. "Intermodal Pricing Model Creates a Network Pricing Perspective at BNSF," Interfaces, INFORMS, vol. 31(4), pages 37-49, August.
    4. Papatla, Purushottam, 1995. "A dynamic model of the advertising-price sensitivity relationship for heterogeneous consumers," Journal of Business Research, Elsevier, vol. 33(3), pages 261-271, July.
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    Cited by:

    1. Zhou, Wei-Hua & Lee, Chung-Yee, 2009. "Pricing and competition in a transportation market with empty equipment repositioning," Transportation Research Part B: Methodological, Elsevier, vol. 43(6), pages 677-691, July.
    2. Li, Dongjun & Islam, Dewan Md Zahurul & Robinson, Mark & Song, Dong-Ping & Dong, Jing-Xin & Reimann, Marc, 2024. "Network revenue management game in the railway industry: Stackelberg equilibrium, global optimality, and mechanism design," European Journal of Operational Research, Elsevier, vol. 312(1), pages 240-254.
    3. Michael F. Gorman, 2023. "Case Article—Louisiana Branch Lines," INFORMS Transactions on Education, INFORMS, vol. 23(3), pages 139-143, May.

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