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This publication uses this formula to fit a model to predict the demand of a product A:

Log_Demand_A = constant + b1*log_Price_A + b2*log_Price_B + b3*Promo_1 + b4*Promo_2 + b5*log_Price_A*Promo_1 + b6*log_Price_A*Promo_2

I have 2 questions.

  1. What is done in practise when businesses sell hundreds of products? Could one fit several models for product A (e.g. own for own elasticity and let's say we have 2 other products B and C, another one for the interaction A->B and another one for the interaction A->C and the combine the demand prediction using some kensemble method).

  2. Are the 2 promos in the above formula specific to product A (i.e. do not necesaarily apply to product B)?

cs0815
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  • When there are hundreds of products, there would be an issue of variables selection. Here variables are the log prices of products. Usually, such a regression also suffers from endogeneity of price. – semibruin Dec 11 '16 at 03:45
  • So is cross elasticity only always/mostly investigated for product pairs? – cs0815 Dec 11 '16 at 09:33

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