Estimation of Brand Demand Elasticities for Self-Operating Radiator Sensors in Ukraine

Demand elasticities estimations are widely used both at macro level for public policy analysis and at micro level for market analysis, particularly, for developing pricing strategies. Demand elasticities measure the responsiveness of the demanded quantity of a product to changes in such demand determinants as the product’s price, customers’ income, and prices of competing goods (Banerjee 2014, 14). If the demand function is represented with a linear equation, elasticity is calculated at a single point of the demand curve (so-called point estimate); to gain more insights about the linear demand, elasticities should be calculated at different points of the curve. Demand described with an exponential function allows for constant demand elasticity calculations. Logarithmic models (logarithmic functions are the inverses of exponential functions) are most commonly used in applied econometrics for calculating constant elasticities of demand determinants. In practical terms, it is worth stressing that although demand elasticities do measure responsiveness to changes in demand determinants, elasticity calculations per se are not sufficient for defining profitable pricing strategies. As John Daly puts it, “It is doubtful that many companies will routinely price their products by solving a single algebraic equation that determines the single best price for a product. The reason for this is that it is worthwhile to “play” with various pricing scenarios to obtain a deeper understanding of the customer demand curve and the cost–volume curve to understand the profit sensitivity if everything does not happen as planned” (Daly 2001, 29).