Merits and limitations of market studies and experimentation as a method of demand forecasting

An alternative technique for obtaining useful information about a product’s demand function involves market experiments. The firm locates one or more markets with specific characteristics, and then varies prices, packaging, advertising, and other controllable variables in the demand function, with the variations occurring either over time or between markets. One market
experiment technique entails examining consumer behavior is actual markets. The firm may also be able to sue census or survey data to determine how such demographic characteristics as income, family size, educational level and ethnic background affect demand.

Market experimentation procedure utilizes a controlled laboratory experiment where in consumers are given funds with which to shop in a simulated store. By varying prices, product packaging, displays, and other factors, the experimenters can often learn a great deal about consumer behavior. The laboratory experiment, while providing similar information as field experiments has advantages/merits because of lower cost and greater control of extraneous factors. Merits and limitations of market experiments can be shown as below:

Merits
  1. Market experiments are based on actual consumer behavior and not on merely their intentions to buy the commodity. 
  2. They provide more accurate returns than those of consumer survey because consumers are asked to make actual decisions regarding their purchase.
Limitations
  1. Market experiments are costly and much time consuming. 
  2. If the price rises, the consumers may switch over to the products of the rival firms. If the price reduced to the original level, it may be difficult to regain the lost customers.
  3. It is also difficult to select an area, which accurately represents the potential market.
  4. Firm cannot control all the factors (i.e. bad weather, economic conditions, occupation situations etc.) that influence demand for a product.
  5. The changes in price or adverting to know consumer’s response may go unnoticed by them in such a short period. 
  6. The selected consumers may not respond accurately when they know they are a part of an experiment being conducted and their behavior is being recorded.

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