BEM Hot Dogs

8/8/2019 BEM Hot Dogs

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HOT DOGS: DUBUQUE


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THE REGRESSION MODEL

Dependent Variable:

y Market Share of Dubuque (MKTDUB)

Independent Variables:

y Price of Dubuque (PDUB)y Price of Oscar (POSCAR)

y Price of Ball Park Regular (PBPREG)

y Price of Ball Park Beef (PBPBEEF)


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RESULTS


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OBSERVATION AND INTERPRETATION

R-squared: 0.5263

y The model explains 52.63% of the variation in market

share

All coefficients are statistically significant except:y PBPREG

y PBPBEEF

Suggests a presence ofmulticollinearity

y The two variables have a high degree of correlation


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CORRELATION MATRIX

An extremely high correlation between the two is observed

This clearly denotes Multicollinearity


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SOLUTIONS FOR MULTICOLLINEARITY

1. Do Nothing

2. Rule of Thumb Procedures

3. A priori information

4. Combining Cross sectional and time series data: Pooling

5. Dropping variables

6. Transformation of variables

1. Log transformation : lnY=ln1+2lnX2i+3 lnX3+u

2. Ratio transformation:Yi/X2i=1/1(X2i)+2 +3 (X3i/X2i)+(ui/X2i)

3. For time series: The first difference methodYt-Yt-1=2(X2t-X2t-1)+3 (X3t-X3t-1)+vt

7. Additional or new data

8. Polynomial regressions

9. Other methods: PCA, Factor Analysis, Ridgeregression etc.


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NEW MODELS

Dependent Variable:

y Market Share of Dubuque (MKTDUB)

Independent Variables:

y Price of Dubuque (PDUB)y Price of Oscar (POSCAR)

y Price of Ball Park Regular (PBPREG)/Price of Ball

Park Beef (PBPBEEF)


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RESULTS

All coefficients are significant now


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RESULTS

All coefficients are significant now


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FURTHERANALYSIS

For further analysis, either model can be used:

We choose PBPREG:

y The price of Regular is about to drop

Possible drawback:y Omitted variable bias

Omitted Variable Bias not likely to affect result

y Omitted variable affects the dependent variable in

the same way as retained variabley Extremely high correlation between the two


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F- TEST

H0: B1=B2=B3=0

H1: All Bis not equal to 0

F statistic= 40.28690

P-value= 0.0000

Thus, we reject H0 in favor ofH1y The model, overall, is successful in explaining the variations

in market share of Dubuque

Therefore the final model is:MKTDUB= 0.04 0.00076*PDUB + 0.000263*POSCAR + 0.000460*PBPREG


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Q&A

Q1) How does Dubuques price affect its Market Share?

y The coefficient for PDUB is -0.00076. So, for every 1 cent risein PDUB, the market share drops by 0.076%

Q2) Does Oscars price affect Dubuque? How?

y The p-value ofPOSCAR is 0.0022, which means that it isstatistically significant. So POSCAR does affect MKTDUB.For every 1 cent rise ofPOSCAR, MKTDUB increases by0.0263%

Q3) Does Ball Parks price affect Dubuque? How?

y The p-value ofPBPREG is 0.0000, which means that it isstatistically significant. So PBPREG does affect MKTDUB.For every 1 cent rise ofPBPREG, MKTDUB increases by0.046%


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Q&A

Q4) Which one is Dubuques primary competitor?

y The coefficients ofPOSCAR and PBPREG are0.000263 and 0.000460 respectively. Clearly BallPark has greater impact and is the bigger competitor

Q5) If Dubuque doesnt respond to Ball Park, howmuch market share is it expected to lose?

y Price drop= 34 cents

y Thus, drop in MKTDUB= 0.000263*34= 0.89%

Q6) How much should Dubuque charge tomaintain its current market share?y Expected drop in share= 0.0089

y Coefficient= 0.00076

y Price Reduction= 0.0089/0.00076= 11.71 cents

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BEM Hot Dogs