Cross Price Elasticity of Demand (Evaluation Skills Video)

In this short video we build 3 analysis and evaluation points for this question: "Evaluate the significance of the coefficient of cross price elasticity for a business"

Core Notes:

Evaluate the significance of the coefficient of cross price elasticity for a business

A high and positive coefficient of CPED is important for a business because it suggests a strong substitution effect if relative prices fall.

Eval: However the size of the substitution effect will be lower if consumers perceive a relative price change to be temporary and not permanent.

A negative CPED says that two products are complements – this might persuade businesses to bundle products to increase revenue

Eval: Bundling does not always work. Consumers may not like the increased complexity of bundled products and working out the perceived value of the bundled offer

A low positive cross price elasticity of demand between competing sellers suggests the possibility of increased revenue from price collusion

Eval: However, price collusion is illegal and risks heavy fines for those caught. Game theory suggests that most cartels eventually collapse.