To measure the effect of retail price promotion on sales of substitutes and complements, retail price promotional activities on the brand and its substitutes and complements within a store are in the model. In this study, dependent variable is sales of one brand and independent variables are the retail prices of competing or substitute brands and complement brands in tooth brush and toothpaste category.
(1) Sales
i=Σχ
iβ
i whereβ
i = retail price of high-priced brand 1 to 6It is specified here for high price level brand CO.
Sales
CO=X
1β
CO+X
2β
OB+X
3β
CR+X
4β
KCO+X
5β
KOB+X
6β
KTOWhere
β
CO = retail price of toothbrush Brand COβ
OB =retail price of toothbrush Brand OBβ
CR =retail price of toothbrush Brand CRβ
KCO =retail price of toothpaste Brand KCOβ
KOB =retail price of toothpaste Brand KOBβ
KTO = retail price of toothpaste Brand KTO(2) Sales
j=Σγ
jα
j whereα
j = retail price of low-priced brand 1 to 6For example,
SalesPE=γ0+γ1αPE +γ2αBU +γ3αOB +γ4αKCR +γ5αKCL +γ7αKCO
The equation contains variables pertaining to the brand itself (α1), the brand’s substitutes in the product category (α2 and α3), and the brand’s complements (α4, α5 and α6).
TABLE 7 Summary the method and sample of substitute and complement literature.
Selected literature
Topic Study Result Product category of sample
Within a store, price promotion produced the largest amount of brand substitution, followed by also were detected in several cases s the promotions of the products in one store
They calibrate how the regular and deal prices of individual brands influence the sales of substitute and complementary
In economics, elasticity is the proportional change in one variable relative to the proportion change in another variable. The concept of elasticity can be used whenever there is a cause and effect relationship.
In economics, the price elasticity of demand (PED) is an elasticity that measures the nature and degree of the relationship between changes in quantity demanded of a good and changes in its price.
Price elasticity of demand is measured as the percentage change in quantity demanded that occurs in response to a percentage change in price. For example, if, in response to a 10% fall in the price of a good, the quantity demanded increases by 20%, the price elasticity of demand would be 20%/(− 10%) = −2. (Case & Fair, 1999).
In general, a fall in the price of a good is expected to increase the quantity demanded, so the price elasticity of demand is negative as above. Note that in economics literature the minus sign is often omitted and the elasticity is given as an absolute value. (Case & Fair, 1999). Because both the denominator and numerator of the fraction are percent changes, price elasticities of demand are dimensionless numbers and can be compared even if the original calculations were performed using different currencies or goods.
An example of a good with a highly inelastic demand curve is salt: people need salt, so for even relatively large changes in the price of salt, the amount demanded will not be significantly altered. Similarly, a product with a highly elastic demand curve is red cars: if the price of red cars went up even a small amount, demand is likely to go down since substitutes are readily available for purchase (cars of other colors).
It may be possible that quantity demanded for a good rises as its price rises, even under conventional economic assumptions of consumer rationality. Two such classes of goods are known as Giffen goods or Veblen goods. Another case is the price inflation during an economic bubble. The unicist approach to price elasticity solved the problem integrating the demanded quantity, its subjective value and the price.
The formula used to calculate the coefficient of price elasticity of demand is
Using all the differential calculus:
where: P = price, Q = quantity
When the price elasticity of demand for a good is elastic (Ed > 1), the percentage change in quantity is greater than that in price. Hence, when the price is raised, the total revenue of producers falls, and vice versa.
When the price elasticity of demand for a good is inelastic (Ed < 1), the percentage change in quantity is smaller than that in price. Hence, when the price is raised, the total revenue of producers rises, and vice versa.
When the price elasticity of demand for a good is unit elastic (or unitary elastic) (Ed = 1), the percentage change in quantity is equal to that in price. Hence, when the price is raised, the total revenue remains unchanged. The demand curve is a rectangular hyperbola.
When the price elasticity of demand for a good is perfectly elastic (Ed = ∞), any increase in the price, no matter how small, will cause demand for the good to drop to zero. Hence, when the price is raised, the total revenue of producers falls to zero. The demand curve is a horizontal straght line. A ten-dollar banknote is an example of a perfectly elastic good;
nobody would pay $10.01, yet everyone will pay $9.99 for it.
When the price elasticity of demand for a good is perfectly inelastic (Ed = 0), changes in the price do not affect the quantity demanded for the good. The demand curve is a vertical straight line; this violates the law of demand.
Elasticity is an important concept in understanding the different types of goods as they relate to the theory of consumer choice. In economics, the cross elasticity of demand or cross price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in the price of another good.
It is measured as the percentage change in demand for the first good that occurs in response to a percentage change in price of the second good. For example, if, in response to a
10% increase in the price of fuel, the quantity of new cars that are fuel inefficient demanded decreased by 20%, the cross elasticity of demand would be -20%/10% = -2.
In the example above, the two goods, fuel and cars, are complements - that is, one is used with the other. In these cases the cross elasticity of demand will be negative. In the case of perfect complements, the cross elasticity of demand is negative infinity.
Where the two goods are substitutes the cross elasticity of demand will be positive, so that as the price of one goes up the quantity demanded of the other will increase. For example, in response to an increase in the price of fuel, the demand for new cars that are fuel efficient (hybrids for example) will also rise. In the case of perfect substitutes, the cross elasticity of demand is positive infinity.
Where the two goods are independent the cross elasticity demand will be zero, as the price increase the quantity demanded will be zero, an increase in price 'zero quantity demanded'. In case of perfect independence, the cross elasticity of demand is zero.
(3) Cross-Price Elasticity = (percentage change in amount of A bought) divided by (percentage change in price of B).
Take low price brands for example,
Sales
TP= γ
0+ γ
1α
PE+ γ
2α
BU+ γ
3α
OB+ γ
4α
KCR+ γ
5α
KCL+ γ
7α
KCOSales
TB= γ
0+ γ
1α
PE+ γ
2α
BU+ γ
3α
OB+ γ
4α
KCR+ γ
5α
KCL+ γ
7α
KCOSales
TOTAL= γ
0+ γ
1α
PE+ γ
2α
BU+ γ
3α
OB+ γ
4α
KCR+ γ
5α
KCL+ γ
7α
KCO
It is measured as the percentage change in demand for the toothpaste that occurs in response to a percentage change in price of the toothpaste and tooth brush. Where the two goods are substitutes the cross elasticity of demand will be positive, so that as the price of one
TABLE8 A brief summary of the literature estimating price elasticity
Study Product category Price elasticity Type of data
Functional specification
Guadagni & Little(1983)
Ground coffee -1.9 to -3.4 Household data
Disposable diapers NA Store data Linear
Kamakura & Russell (1989)
NA -2.2 to -4.6 Household
data
Logit models
Bolton (1989) Frozen waffles, liquid bleach, toulet
Margarine -1.8 to -5.9 Household data
Logit models
Gonul & Srinivasan (1993)
Disposable diapers -1.7 to -3.9 Household data