Controlling Demand Through Pricing

1391 Words Nov 28th, 2015 6 Pages
Controlling Demand through Pricing: A report on the quantitative analysis of the ChocoMint bar

Introduction
ChocoMint is a bar of chocolate under ChocoHeaven, which is a distributor of organic chocolate. In recent years, the business of ChocoMint bar encountered some problems. Since the ChocoMint bar is manufactured overseas, the supply chain could be unreliable. Besides, as ChocoMint is stored at special storage locations in the UK, the storage capacity for this kind of product in the UK is limited. Therefore, in order to prevent the storage from exceeding the company’s storage capacity limits, as well as reduce the risk from supply chain (relying less on the overseas supply chain), sales department of ChocoHeaven has been trying to
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It is not a suitable model for the data that beyond its specific range of domain. Usually, the valid range of domain of a linear equation is quite narrow when it is applied to practical problem. Finally, linear models are typically based on a set of assumptions such as the requirement of simplification of the data. They are not really suitable models for those data with complex context.

4.2 A more appropriate model
In the case of ChocoMint bar, the hyperbolic model might be more appropriate.

Figure4.2 hyperbolic relationship between monthly demand for ChocoMint and relative prices

y = 836.78x-0.854 R² = 0.8488 R = -0.9213

4.3 Justification of the hyperbolic model’s higher suitability

Firstly, compared with the linear model, the value of correlation R of this hyperbolic model is closer to 1. Thus, it indicates that the hyperbolic model represents the relationship between the price and monthly demand much better.

Secondly, in the linear model, it shows that when the price decreases to 0 (which means the ChocoMint bar is free), there is a limited demand for ChocoMint bar. However, the demand for free goods are usually infinite in practice, which is exactly demonstrated by the hyperbolic model. As the hyperbolic graph above indicates, when the price is approaching zero, the graph does not intercept the y-axis. On the contrast, it is infinitely close to y-axis with increasing values of monthly demand, which
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