Managerial Economics and Strategy, 2/e

3.4 Regression Specification

Far better an approximate answer to the right question, which is often vague, than an exact answer to the wrong question, which can always be made precise.

—John Tukey

The first step in a regression analysis is to select a regression equation. We must determine the regression specification, which includes the choice of the dependent variable, the explanatory variables, and the functional relationship between them (such as linear, quadratic, or exponential). For example, in the Camry demand function regression, the dependent variable is the quantity of Camrys demanded, the only explanatory variable is price, measured in thousands of dollars, and the functional relationship between the variables is linear: $Q=a+b$