Market analysts often use cross-price elasticities to determine a measure of the “competitiveness” of a particular good in a market. How might cross-price elasticities be used in this manner? What would you expect the cross-price elasticity coefficient to be if the market for a good was highly competitive? Why?
Cross-price elasticities are used by market analysts to measure the responsiveness of the demand for a particular good to changes in the price of another related good. This helps determine the degree of substitutability or complementarity between the two goods and provides insights into the competitiveness of a specific good in the market.
In this context, if the cross-price elasticity between two goods is high, it suggests a strong substitutability between them. This means that consumers are more likely to switch from one good to another when its price changes. As a result, the demand for the good in question is more responsive to changes in the price of the related good.
On the other hand, if the cross-price elasticity is low or even negative, it indicates a weak substitutability or complementarity between the two goods. This means that consumers are less likely to switch between the goods in response to price changes. In such cases, the demand for the good in question is less responsive to changes in the price of the related good.
For a good to be considered highly competitive in the market, we would expect its cross-price elasticity coefficient to be high. This suggests that consumers have a wide range of substitute goods to choose from when the price of this particular good changes. The higher the cross-price elasticity, the easier it is for consumers to switch to alternatives, making the market more competitive.
In summary, cross-price elasticities help measure the substitutability between goods and provide insights into the competitiveness of a specific good in the market. A high cross-price elasticity coefficient indicates a more competitive market, as consumers have a greater willingness and ability to switch to substitute goods when the price of the good in question changes.