How can businesses make use of the concept of cross price elasticity of demand?
Pricing strategies for substitutes: If a competitor cuts the price of a rival product, firms use estimates of cross-price elasticity to predict the effect on the quantity demanded and total revenue of their own product. For example, two or more airlines competing with each other on a given route will have to consider how one airline might react to its competitor’s price change. Will many consumers switch? Will they have the capacity to meet an expected rise in demand? Will the other firm match a price rise? Will it follow a price fall? Consider for example the cross-price effect that has occurred with the rapid expansion of low-cost airlines in the European airline industry. This has been a major challenge to the existing and well-established national air carriers, many of whom have made adjustments to their business model and pricing strategies to cope with the increased competition. Pricing strategies for complementary goods: For example, popcorn, soft drinks and cinema tickets have
