Name: Arienne Ivonne van Leeuwen Connolly

Student ID: I6142963

Research question: “Does the amount of US citizens that have a health insurance coverage have an
effect on the industry optical good stores?”

Introduction

This paper analyses the optical good stores industry in the United States, in particular by looking at the
effects of different variables on the size of the industry. The analysis will be based on the research
paper of Martin Carree from 2002. This paper looks for evidence to answer this research question,
focusing on the time period from 1993 until 1997, by running a regression analysis on different
industries in 16 states of the U.S. Similar to Carree, this paper will analyse the outcomes of a
regression analysis on the industry of optical good stores in 16 states of the U.S. The regression will be
based on the second model used in Carrees paper. This paper will begin with a short description of the
industry, followed by an explanation of the regression equation and an analysis of the outcomes. To
conclude, an answer will be provided for the research question of this paper.

Industry description

The optical goods stores industry refers to the establishments in the retail sale of prescription
eyeglasses and contact lenses for individuals. The amount of competition in the optical goods stores
industry has been increasing since independent opticians, optometrists and ophthalmologists started
competing in this market. In the late 1960s optical good stores started to carry out eye exams as well
as sell eyeglasses and contacts. This is when the retail giants started to develop in this industry and it
grew into a competitive retail market as what was first considered a health care field. Over the years
the industry became more competitive due to certain legal changes. Retailers began to use
advertisement to capture a bigger share of the market, it wasn’t only about health anymore.
Furthermore, the necessity for vision correction increases with the age. Therefore it is expected that as
the population ages, sales in this industry will grow.

Regression model

The following regression analysis was used in the Carree paper:

To have a clear understanding of this analysis, it is important to know what each variable represents. It
should be clarified that “i” and “j” are the indices for the state and industry. The first variable (c) is a
industry specific constant and thus the industry intercept of the regression line. The following
variables are the independent variables of the equation. It should be noticed that total population (Pop)
is given in thousands. Then there is the real income per capita (Rinc) and poverty (pov). Poverty
measures the purchasing power of the population. Then there is Urban representing the percentage of
the population that lives in the urban area, the population density (Dens) that is computed as the total
population divided by total state area and Over65 representing the percentage of the population that is
over 65 years old. Lastly, there is the error term which is independently and identically distributed
across industries and regions. Overall, these independent variables influence the dependent variable
which is the amount of optical good stores in the U.S.. Later in the analysis another independent
variable will be added, the percentage of people without a health insurance. Furthermore, the natural
logarithm was applied to certain variables to show the impact of a percentage increase or decrease of
an independent variable on the dependent variable percentage change.

Summary output
Before analyzing the results of the regression, some expectations can be made. It is expected that if
population increases, the number of optical good stores will also increase. This is because an increase
in population will lead to an increase in consumers. The same applies to the relationship between
density and amount of stores. An increase in urbanization is expected to have no impact on the amount
of optical good stores. An increase in real income should be positively correlated with the amount of
stores and poverty should have the opposite relationship with the dependent variable. A higher amount
of income means that consumers have more to spend, which leads to an increase in demand. Lastly,
the variable over65 should be positively correlated with the dependent variable. Often, when people
are ageing their sight becomes worse. This should increase the demand for eyeglasses or contact
lenses.

As regards to the results, the relatively high R-square of 0,9686 means that 96,86% of the model fits
the observations. It is higher than the adjusted R-square of 96,41%. The adjusted R-square is equal to
the R-square adjusted to the number of predictor variables. Unlike the R-square, the adjusted R-square
will only increase if a significant variable is added to the model. In addition, the standard error of
0.2043 measures the accuracy of the predictions.

If a significance level of 10% is used, then the intercept and population are the only significant
variables. So, except for the intercept and the population the rest of the variables are insignificant. This
may be the case due to multicollinearity. This might be the case if some of the independent variables
are highly correlated.. It can also be the case that the insignificant variables don’t have a significant
impact on the amount of optical good stores.

Furthermore, the coefficient of population is equal to 1,05. This means that a 1% increase in
population will result in a 105,1% increase in the amount of optical good stores. This is in line with the
expectations which stated that population and the amount of optical good stores are positively
correlated. In addition, the expectations about urbanization is also correct. This variable is
insignificant and the coefficient is nearly equal to zero. On the other hand, the expectations about the
variable Over65 contradicts the results. The variable is insignificant and the coefficient is close to
zero.
Summary output with extra variable
The new variable is the percentage of the population that does not have a health insurance coverage in
1995. Since it is already measured in percentage, it is not necessary to take the natural logarithm of
this variable. It is expected that this independent variable is negatively correlated with the dependent
variable. The reasoning behind it is that if an individual has a health insurance coverage, it may
indicate that this individual prioritizes its health. So, an individual with a health insurance would be
more willing to spend its money on eyeglasses or contacts if necessary. Therefore, the opposite applies
to an individual without a health insurance. This individual will be more reluctant to purchase
eyeglasses or contacts, even if it is necessary.

However, this was not the case considering the results of the regression analysis with this extra
variable added. The extra variable was insignificant and its coefficient was nearly equal to zero. This
was shown by the adjusted R-square of 0,9686. It is lower than the adjusted R-square of the regression
analysis without the extra variable. The adjusted R-square decreases whenever an extra variable is
added that is not significant. Likewise, the standard error increased to 0,2067. This means that when
the extra variable is added, the observed values fall further away from the regression line. The R-
square remained the same.

Furthermore, a third regression analysis was carried out to examine whether the insignificance of the
extra variable was caused by multicollinearity. The third summary output, where the percentage of US
citizens who don’t have a health insurance coverage is the only independent variable, shows that this is
probably not the case. It results that the extra variable is still insignificant, the r-square is nearly equal
to zero and the adjusted r-square even goes into the minus.

Conclusion
Considering the research question, it is clear that the percentage of U.S. citizens that don’t have a
health insurance coverage don’t influence the amount of optical good stores in the U.S.. The second
and the third summary output proved that with regards to this model, this extra variable is
insignificant.
References

Carree, Martin (2002), “Does Unemployment affect the Number of Establishments? A Regional
Analysis for US States,” Regional Studies, 36(4), 389-398.

US Census Bureau, 1995, Health Insurance Detailed Table: 1995,

Retrieved on 28th November 2018, from:

https://www2.census.gov/programs-surveys/demo/tables/p60/195/hi95t1.txt

Optical good stores profile from referenceforbusiness.com. Retrieved on 28 th November 2018, from:

https://www.referenceforbusiness.com/industries/Retail-Trade/Optical-Goods-Stores.html
Appendix

Summary output 1

Summary output 2 (with extra variable)

Summary output 3 (with only the extra variable as an independent variable)