Cross elasticity of demand

If products A and B are complements, an increase in the price of B leads to a decrease in the quantity demanded for A, as A is used in conjunction with B.

The higher the positive cross elasticity of demand, the more substitutable two products are; thus, the more competition between them.

Similarly, the lower the negative cross elasticity of demand, the more complementary two goods are.

In general, monopolies usually possess a low-positive cross elasticity of demand with respect to their competitors.

In the case of perfect substitutes, the cross elasticity of demand is equal to positive infinity (at the point when both goods can be consumed).

Approximate estimates of the cross price elasticities of preference-independent bundles of goods (e.g. food and education, healthcare and clothing, etc.)

Cross-elastic demand can help enterprises set prices and identify the sensitivity of others to their products.

For example, a strategic "loss leader" takes advantage of the negative cross elasticity of demand for complementary commodities to price in a counterintuitive way deliberately.

A company can sell one of its goods for less than the cost of making it and thus promote sales of its complementary products.

Sony's PlayStation consoles are sold below the cost of making them encourage the sale of games.

As a result, Sony can make up for its net losses in the console business by making big profits in games [14] Besides, unique and irreplaceable products enable companies to sell their products at higher prices.

Therefore, companies should first make a careful study of the elasticity of demand for their products before setting prices.

Phone users who are used to iOS develop a habit that makes it difficult to adapt to other systems, such as Android.

Finally, the providers of substitutes need to be aware of the competitors of their products through detailed market research.

For example, the recently hot quality stars are invited to endorse their company's products.

Alternatively, the company could spend more money on advertising to make consumers aware of the difference between its product and that of its competitors.

The UK and Scottish governments intended to use price-based policy interventions, like setting minimum unit pricing and increasing taxation to reduce alcohol consumption and mediate the related harms among their population.

[15] Estimation of cross-price elasticities of alcohol in respect to other related beverages helps set price-based policy interventions, as it measures the percentage change in demand for one type of alcohol due to a 1% change in the price of another type of beverage.

Therefore, the cross elasticity of demand enables policymakers to take better control of the policy effects, thus, reducing the risk for mortality, morbidity, and other social harms caused by over-drinking.

In this case, the cross elasticity of demand is a reminder to the firms to cautiously selecting products with high dependence on complements.

Businesses that understand the implications of high-positive cross elasticity of demand can reduce their operating risk by avoiding overstock, thus, maintaining a sustainable supply chain.

Knowledge of a firm's cross elasticity of demand and their competitors' allows them to map out the market, enabling them to calculate the number of rivals and the importance of their complementary (and substitute) products relative to their own.

For example, when Anheuser-Busch InBev (the world's biggest brewer at the time) acquired SABMiller (InBev's closest rival) in 2015, it was one of the biggest takeover of a British firm, creating the world's first global brewer.