Regression Analysis of Pricing
Overview
Assuming that we have data of the amount of product purchased for different price points, measuring price elasticity is a
simple matter of running a normal
ols regression.
{% q = \alpha + \beta p %}
where q is amount of product demaned and p is the price point.
Measuring Price Sensitivity vs Multiple Factors
Often there are multiple other factors that influence demand that can be measured and included in the analysis.
In such a case, a multi variable regression such as the following is used.
{% q = \alpha + \beta_1 x_1 + \beta_2 x_2 %}
A typical example would be to include the presence of competitor pricing in the analysis.
{% q = \alpha + \beta_1 p + \beta_2 \times pricediff %}
where pricediff is the difference between your price and a competitors price.
