Team Assignment 2:

Estimating the Demand for Department Store Clothing

This assignment is based on one of my current research projects, “A Two-Sided Entry Model
with Manufacturer-Retailer Contracts” (with Tat Chan and Li Wang), which is currently
Revise and Resubmit at the International Economic Review. For this project, my co-authors and
I acquired fascinating, proprietary data from a major department store in Shanghai, China.

In this department store (which needs to remain unnamed per our agreement), manufacturers
(which we will refer to as brands) negotiate directly with the department store regarding how
much of the sales revenue goes to the store and how much goes to the brand.

For this assignment, you will need to analyze a subset of this department store’s proprietary data.
The dataset that you will use can be found on Blackboard and is called
manufacturer_annual_data.xlsx. Each row of the dataset corresponds to a different brand of
professional women’s clothing that is sold in this department store.

Within this dataset, there are two variables that we will consider to be dependent variables in the
analysis: revenue - A continuous variable describing the brand-specific annual sales given in
millions of Renminbi
profit – A continuous variable describing the brand-specific annual profit to the department store
given in millions of Renminbi. This reflects the department store’s share of revenue after they
pay the brand manufacturer a share of revenue.

There are also four variables that we will consider to be independent variables in the analysis:
rating - A continuous variable describing the department store’s own rating of the brand
image - A dummy variable which equals 1 if department store feels the brand’s image is
consistent with that of the department store, 0 otherwise
nationwide - A dummy variable which equals 1 if brand is also sold outside of Shanghai, 0
otherwise
foreign -- A dummy variable which equals 1 if a brand is foreign, 0 otherwise
 Estimation and Hypothesis Testing
(5 points each)

1. Describe annual brand revenue by estimating a regression model relating the four
independent variables to revenue . Report your results using the bottom table from
standard Excel output.

2. Interpret each of the four slope coefficients in one sentence each.

3. Are each of these parameters individually significant at the .05 level? Explain in one
sentence how you came to this conclusion.

4. Describe annual brand profit by estimating a regression model relating the four
independent variables to profit. Report your results using the bottom table from
standard Excel output.

5. Are these parameters jointly significant at the .05 level? Explain in one sentence
how you came to this conclusion.

Analysis
(5 points each)

6. Consider now that you have been presented with the information contained in the
regressions above. As a manager, would you feel comfortable taking a causal
interpretation of these estimates? Explain why or why not.

7. Again as a manager, would you be comfortable using this as a predicative exercise

8. You notice, after comparing the R-square numbers from the two regressions, that it
appears that we do a better job predicting revenue than predicting profit. Explain
why you think that this might be the case.

9. As you think more deeply about the data, do you think multicolinearity could have
played a role in causing some estimates to be not statistically significantly different
from zero? Explain why or why not.
10. As you continue to think about the analysis, would you consider dropping any
variables from either regression equation? If so, which variables? Discuss the pros
and cons of dropping these variables.

Bonus Analysis
(5 points extra)

11. In the above regressions, we have implicitly assumed that the relationship between
the dependent variable and the independent variables is linear. Specify and estimate a
different functional form for the regression models. Justify your choice and provide
the output tables as in (1) and (4). Interpret your estimates as in (2).
12.
 WPC 501 Team Assignment 2 Cover Page

I have adhered to the ASU Student Academic Integrity Policy when completing this team
assignment.
1. I have not received information about this team assignment from a student who is
not part of my group.
2. I have not provided information about this team assignment to a student who is
not part of my group.

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