II. Description of Variables
RD Variables
RD is the Relative Demand for our firm's product. It is the Dependent variable. RD is a measure of competitive strength. The RD is dependent upon the independent variables Prel (Relative price of our product), Arel (relative advertising of our firm), and RD1 (last quarters RD). Prel is calculated by dividing our firm price by the industry Average Price. Arel is calculated by dividing our firms advertising expenditure by the industry average. RD1 is last year's relative demand. This can be used to measure brand loyalty by seeing the difference between the RD for the two years. If they are similar or year two has increase, brand loyalty has remained constant or risen. However, if year two falls below year one, then it can be assumed that brand loyalty has declined.
Correlation Matrix and Scatter plots can be used to describe the relationships between the Independent variables and the dependent variable.
|
|
RD |
Prel |
Arel |
RD1 |
|
RD |
1 |
|
|
|
|
Prel |
-0.67032 |
1 |
|
|
|
Arel |
0.378241 |
0.173736 |
1 |
|
|
RD1 |
0.710633 |
-0.26606 |
0.045958 |
1 |
As stated above, there needs to be a high correlation between the dependent variable (RD) and the independent variables (Prel, Arel, & RD1), as well as a low correlation between the individual independent variables. There are higher correlations between RD and Prel & RD1, however, the correlation between RD and Arel is 38%. There are low correlations between all the independent variables.
Scatter plots also help in determining relationships:
The equations and R-squares are used in establishing relationships. As you can see there are high R-squares for RD Vs. Prel and RD1 Vs. RD1. There is a low R-square between Rd Vs. Arel.
From this information, we can assume that RD1 and Prel have high relationships to the dependent variable, RD. Arel has a lower relationship, and therefore should be studied closer to determine if it can be depended upon to determine the RD. These studies can be seen in the RD model (Section III).