MKTG 4110 Class 12

Cross-Price Elasticities

 there were some factors we did not consider in log log model,
 What we did not account in the model
o ignores category management concerns
o Ignores response by competitors

Cross-Price Elasticities
 Key Metric to Capture
Relationship

 Cross price elasticity quantifies

how a change in the price of
product A affects sales of product
B

Elasticity and Cross Price Elasticity

 Elasticity and Cross Price Elasticity predict changes in demand in response to price changes
 Cross price elasticities can help quantify a brand’s competitive strength.
 It is strong if:
(a) my price affects other brand’s sales and
(b) other brands’ prices do not affect my sales

 An increase in price in brand 1 leads to a decrease 2% in quantity for brand 1

 An increase in price in brand 1 leads to an increase in 0.7% in quantity for brand 2
 An increase in price in brand 2 leads to a increase in 0.5% in quantity for brand 1
 An increase in price in brand 2 leads to a decrease 3% in quantity for brand 2
 What if the p-value of an own- or cross-price elasticity is > 0.05?,
o It Is not statistically significantly effected
 Substitutability
 It is still the key intuition to
understanding (cross & own) price
elasticity
 Elasticities capture different types of
product substitution among consumer
 Own elasticities are larger because
there are more ways for own product
volume to change

Measure cross-price elasticity using a log-log demand regression model?

 In our original log-log demand model, we add other product’s price as another variable

EXAMPLE: With 3 brands, we have 3 equations

 Assume there are Tropicana, MinuteMaid, and Store Brand inside the Rouses Market
Describe in words the impact of
decreasing the price of Tropicana by
1% on Tropicana’s unit sales?
 A decrease in 1% means a increase in
3.42% in sales
Describe in words the impact of
decreasing the price of MinuteMaid by
1% on Tropicana’s unit sales?
 A decrease in 1% means an decrease
sales by 1.78% of Tropicana
Who seems to be the closest competitor to Tropicana?
 Minute Maid, as has biggest impact
 But for Minute Maid could be either
 But for Store Brand could be minute maid
If you were the retailer and had to increase the price of only one of the three products,
which product would you choose? Why? Provide a short description below:
 Minute Maid, they lose the least volume and still increase sale in others