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Generalized Demand Densities for Retail Price Investigation

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DOI: 10.4236/ajibm.2013.33034    4,706 Downloads   6,501 Views   Citations

ABSTRACT

The paper introduces generalized demand densities as a new and effective way of conceptualizing and analyzing retail demand. The demand density is demonstrated to contain the same information as the demand curve conventionally used in economic studies of consumer demand, but the fact that it is a probability density sets bounds on its possible behavior, a feature that may be exploited to allow near-exhaustive testing of possible demand scenarios using candidate demand densities. Four such demand densities are examined in detail. The Household Income demand density is based on the assumption that a persons maximum acceptable price (MAP) for an item is proportional to his household after-tax income. The Double Power demand density allows the mode to be located anywhere in the range between zero and the highest MAP possessed by anyone in the target population. The two-parameter, Rectangular demand density, the simplest model that a retailer may employ, has the useful feature that it may be matched relatively easily to any unimodal demand density and hence may act as its approximate proxy. The Kinked demand density is derived from the kinked demand curve sometimes used as a relatively uncomplicated way of conceptualizing the effects of oligopoly. The central measures of each of these demand densities are derived: mean price, mode, median, optimal and, when appropriate, the mean of the matched Rectangular demand density. In a further result arising from the use of demand densities, it is shown that stable trading at the kink price will not occur if the demand curve is kinked and convex.

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

P. Thomas and A. Chrystal, "Generalized Demand Densities for Retail Price Investigation," American Journal of Industrial and Business Management, Vol. 3 No. 3, 2013, pp. 279-294. doi: 10.4236/ajibm.2013.33034.

References

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