Demand Equations for Business Simulations with Market Segments

Abstract

This article presents a demand model which combines normal economic factors, such as price and advertising, with a set of physical attributes of products in establishing the market share allocations, as well as the aggregate levels of demand for business simulations. The usual assumptions of demand equations used in simulations (multiple firms producing homogeneous products and selling to a single market) are expanded to a more realistic representation of an actual marketplace. Multiple market segments exist, each with their own preference mapping. Different products may have different sets of physical attributes. Each product has its own set of attributes which are determined by the management team of the firm producing the product. In this model buyers choose among alternative products, selecting those that best fit their needs and desires. If similar products are produced, the market cannibalizes one productfor the other. If a product has only a few desirable characteristics, then the market will largely reject it. In the eyes of the buyer, the poorer the product, the fewer the sales. Marketing pressures from price, promotion, and sales force efforts affect demand but do not need to dominate the product attributes. The relative importance among the economic and product attributes can be controlled by the simulation administrator.