Combining perceptual and economic variables in the demand function

An item response theory is combined with a main-effect demand function for predicting product sales from perception and price. In the sales function perception is measured on a log interval scale, whereas price is measured on its usual ratio scale. The most important main effect in this function represents a composite of unspecified attributes and other sources of demand variation over competing products. The extraction of this effect serves to unbias the perceptual impact and price elasticity estimates by relieving the underspecification common to demand functions. This main effect also reveals product values that may be studied in subsequent investigations. The present approach of concatenating psychological and economic variables in the same demand equation is illustrated with an analysis of data from a high-tech consumer market.