week 6 response questions

respond to the student

James Taylor

Kotler & Keller (2012) note that “If demand hardly changes with a small change in price, we say the demand is inelastic. If demand changes considerably, demand is elastic (p. 392). Demand is inelastic when a minor change in price has little impact on it. Demand is elastic when it is directly impacted by a change in price.

Cross-price elasticity of demand can be utilized to identify competitors (substitutes). Moffatt (n.d.) observes that “The Cross-Price Elasticity of Demand measures the rate of response of quantity demanded of one good, due to a price change of another good” (page 1). This measurement identifies substitutes (or competitors) and complements.

Brand loyalty has a relevant impact on price sensitivity. Kotler & Keller (2012) claim that “Brand loyalty provides predictability and security of demand for the firm, and it creates barriers to entry that make it difficult for other firms to enter the market. Loyalty also can translate into customer willingness to pay a higher price” (p. 242). Brand loyalty has the potential to cause demand to be inelastic. Table 14.3 lists some factors that lead to less price sensitivity, two of which include: (1) The product is more distinctive and (2) the product is assumed to have more quality, prestige, or exclusiveness (Kotler & Keller, 2012, p. 391). These two factors are directly related to branding a product or service, which in turn helps build loyalty.

References

Kotler, P., & Keller, K. L. (2012). Marketing management (14th ed.). Upper Saddle River, NJ: Pearson Prentice Hall.

Moffatt, M. (n.d.). Cross-Price Elasticity of Demand. Retrieved October 1, 2013 from

http://economics.about.com/cs/micfrohelp/a/cross_price_d.htm

sabrina

It is possible, and somewhat common to use the concept of price elasticity in order to identify the competitors for a specific brand. This is done using cross price elasticity which measures the responsiveness of demand for good X following a change in the price of a related good Y. (Burrow, 2010) When using cross elasticity it is important to determine the difference between substitute and complementary products. Complementary products are those that are in joint demand. When a powerful complementary relationship exists between 2 products, the cross-price elasticity is negative. (Burrow, 2010) An example might be games consoles and video games.

In contrast, substitute products are those that result in demand for a rivals product being greater when the price is raised on the particular product. A common example for this might be the way people purchase music today. As the spread of downloadable music as well as other internet based technology allow people to get their music straight from the computer, there is less of a need to purchase CD’s. This has resulted in the amount of people downloading their music skyrocketing, while the amount of people purchasing CD’s moving downward. Using both complementary and substitute products can help reveal competitors for a brand in an effective and efficient way.

Burrow, J. (2010). Business finance. New York: Cengage Learning.