### Econometric Modeling

• ##### What is Econometric Modeling?
Econometrics involve the formulation of mathematical models to represent real-world economic systems, whether the whole economy, or an industry, or an individual business. Econometric modeling is used to analyze complex market trends (the demand function) to determine the variables driving the growth or shrinkage of demand for a product or service. Econometric models are used to decipher the economic forces that affect supply and costs (the supply function) within an industry. Few companies really understand the external forces that drive their industries, their companies, or their brands. Understanding these forces provides the foundation for strategy development and business planning.

Times-series analysis, cross-sectional time-series analysis, structural-equation modeling, input-output analysis, Markov-chain analysis, and multiple regression are some of the techniques used in econometric modeling. Many other statistical and mathematical tools are employed as well, depending on the nature of the econometric task, in the development of econometric models.

Marketing mix modeling is one application of econometric modeling, wherein all marketing inputs are modeled over time to arrive at an optimal allocation of marketing inputs. For example, what is the correct amount to spend on television advertising compared to the radio or the Web? Should a company invest money in more salespeople or in more advertising? What is the impact of promotional spending?

Demand forecasting is another econometric application. For example, econometric analyses reveal that the growth in the number of women working in the U.S. played a major role in the growth of the restaurant industry from 1950 to 2000. But other variables were at work too. Rising incomes made eating out more affordable. Rising car ownership, especially among teenagers and college students, translated into greater restaurant sales. Understanding the variables that underlie demand makes it possible to forecast an industry’s future.

The ultimate application of econometrics is the creation of a comprehensive model of a market, an industry, or a company, so that the interaction of all economic variables can be understood and predicted. A DecisionSimulator™ can be constructed so that senior executives can explore many different “what if” scenarios as the business environment changes. If the price of oil spikes, how will it affect your company? How should your company respond? If interest rates rise sharply, what will be the effect on your business in six months?

Econometrics provides powerful tools to help companies predict and manage the future.

### Why Decision Analyst?

Decision Analyst, as a leading global marketing research and analytical consulting firm, has the experience and expertise to conduct sophisticated Econometric Modeling for businesses, governments, universities, and nonprofit organizations. If you would like more information or would like to discuss a possible project, please contact Jerry W. Thomas, President/CEO (jthomas@decisionanalyst.com), or Elizabeth Horn, Ph.D., Senior Vice President of Advanced Analytics (ehorn@decisionanalyst.com), or call 1-800-ANALYSIS (262-5974) or 1-817-640-6166.