Market Experiments

Unlike consumer clinics, which are conducted under strict laboratory conditions, market experiments are conducted in the actual marketplace. There are many different ways of performing market experiments. One method is to select several markets with similar socioeconomic characteristics, and change the commodity price in some markets or stores, packaging in other markets or stores, and the amount and type of promotion in still other markets or stores, and record the different responses (purchases) of consumers in the different markets. By using census data or surveys for various markets, a firm can also determine the effect of age, sex, level of education, income, family size, etc., on the demand for the commodity. Alternatively, the firm could change, one at a time, each of the determinants of demand under its control in a particular market over time and record consumers’ responses.

The advantage of market experiments is that they can be conducted on a large scale to ensure the validity of the results and consumers are not aware that they are part of an experiment. Market experiments also have serious disadvantages, however. One of these is that in order to keep costs down, the experiment is likely to be conducted on too limited a scale and over a fairly short period of time, so that inferences about the entire market and for a more extended period of time are questionable. Extraneous occurrences, such as a strike or unusually bad weather, may seriously bias the results in uncontrolled experiments. Competitors could try to sabotage the experiment by also changing prices and other determinants of demand under their control. They could also monitor the experiment and gain very useful information that the firm would prefer not to disclose. Finally, a firm may permanently lose customers in the process of raising prices in the market where it is experimenting with a high price.

Despite these shortcomings, market experiments may be very useful to a firm in determining its best pricing strategy and in testing different packaging, promotional campaigns, and product qualities. Market experiments are particularly useful in the process of introducing a different product, where no other data exist. They may also be very useful in verifying the results of the other statistical techniques used to estimate demand and in providing some of the data required for there other statistical techniques of demand estimation.