Measuring Consumer and Competitive Impact with Elasticity Decompositions

Abstract

In this article, I discuss three methods of decomposing the elasticity of own-good demand. One of the methods, the decision-based decomposition (Gupta, 1988), is useful in determining the influence of changes in consumers' decisions on the growth in own-good demand. The other two methods, the unit-based decomposition (van Heerde et al., 2003) and the share-based decomposition (Berndt et al., 1997), are useful in determining whether the growth in own-good demand has been stolen from competing goods.

The objective of this article is to provide a clear and accurate method that attributes the growth in own-good demand to changes in: (1) consumers' decisions, (2) competitive demand, and (3) competitive market share. I will accomplish this by settling some confusion about what the decision- and share-based decompositions mean, by discussing how each of the decompositions relate to the others, and by discussing the research questions that each of the decompositions can answer.

Keywords: elasticity decompositions, demand models

JEL Classification: C81, D10, M3