Business – 8.1 Marketing analysis – Elasticity | e-Consult
8.1 Marketing analysis – Elasticity (1 questions)
Login to see all questions.
Click on a question to view the answer
Model Answer:
A positive XED indicates that the two products are substitutes; a rise in the price of one leads to an increase in the demand for the other. An XED of +1.5 shows a strong substitutable relationship.
Implications for pricing the new product:
- Competitive pricing: To capture market share from the existing product, the new product should be priced lower than the existing one, encouraging consumers to switch.
- Strategic price differentiation: If the firm wants to maintain both products, it may set a slightly higher price for the new product but must ensure that the price gap does not exceed the point where consumers overwhelmingly prefer the cheaper substitute.
- Revenue impact: Because the XED is greater than 1, a small price reduction on the new product will generate a proportionally larger increase in its quantity demanded, potentially offsetting the lower margin.
Therefore, the firm should adopt a pricing strategy that leverages the high substitutability—typically a lower introductory price—to attract customers from the existing product while monitoring overall profitability.