cross-elasticity of demand

cross-elasticity of demand

see ELASTICITY OF DEMAND.

cross-elasticity of demand

a measure of the degree of responsiveness of the DEMAND for one good to a given change in the PRICE of some other good.

Products may be regarded by consumers as substitutes for one another, in which case a rise in the price of good B (tea, for example) will tend to increase the quantity demanded of good A (coffee, for example). Here the cross-elasticity of demand will be positive since as the price of B goes up the quantity demanded of A rises as consumers now buy more A in preference to the more expensive B.

Alternatively, products may be regarded by consumers as complements that are jointly demanded, in which case a rise in the price of good B (tea, for example) will tend to decrease not only the quantity demanded of good B but also another good, C (sugar, for example). Here the cross-elasticity of demand will be negative since a rise in the price of B serves to reduce the quantity demanded of C.

The degree of substitutability between products is reflected in the magnitude of the cross-elasticity measure. If a small increase in the price of good B results in a large rise in the quantity demanded of good A (highly cross-elastic), then goods B and A are close substitutes. Likewise, the degree of complementarity of products is reflected in the magnitude of the cross-elasticity measure. If a small increase in the price of good B results in a large fall in the quantity demanded of good C (highly cross-elastic), then goods C and B are close complements.

Cross-elasticities provide a useful indication of the substitutability of products, so helping to indicate the boundaries between markets. A group of products with high cross-elasticities of demand constitutes a distinct market, whether or not they share common technical characteristics; for example, mechanical and electronic watches are regarded by consumers as close substitutes. See MARKET.

References in periodicals archive ?
441, 453 (1964) ("Interchangeability of use and cross-elasticity of demand are not to be used to obscure competition but to 'recognize competition where, in fact, competition exists.'" (quoting Brown Shoe Co.
10-3458) ("'the outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it'" (quoting Brown Shoe Co., Inc.
18, 2004) ("It is insufficient for an expert to merely mention cross-elasticity of demand or supply; an analysis is required.").
The cross-elasticity of demand between primary care and pediatric services appears to be low enough to classify them into two distinct markets.
Again, one ideally would like to use a cross-elasticity of demand measure to observe the extent that patients will travel to visit physicians when there are relative changes in physician fees.
Was it a difference of opinion as to the cross-elasticity of demand? Or were the politically appointed regulators moved by a higher voice?
Let [L.sup.M] denote the Lerner index for the multimarket measure of market power, [R.sup.i] dominant firm revenues, and [[epsilon].sup.ji.sub.d] the cross-elasticity of demand for the dominant firm.
Finally, it is worth noting that cross-price elasticity does not have some of the limitations affecting cross-elasticity of demand. The most important is that cross-elasticity of demand is constrained in size by the direct price elasticity.
Finally, cross-elasticity of demand or price concepts are useless since no quantitative standard is implied by economic theory.
In Brown Shoe, the Court held that the outer boundaries of a product market are determined by the reasonable interchangeability of use or cross-elasticity of demand between the product itself and substitutes for it,(8) and the "cross-elasticity of production facilities may also be an important factor in defining a product market..."(9) The Court thus treated reasonable interchangeability synonymously with cross-elasticity.
illegal.(35) The Court went on to elaborate that, "[i]f a slight decrease in the price of cellophane causes a considerable number of customers of other flexible wrappings to switch to cellophane, it would be an indication that a high cross-elasticity of demand exists between them; that the products compete in the same market."(36)
Formally, cross-elasticity of demand is defined as the percentage change in quantity demanded for one good resulting from the percentage change in price of another good.