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Own and Cross-Price Elasticity

Essay by   •  May 2, 2012  •  Essay  •  481 Words (2 Pages)  •  3,355 Views

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Question 1:

Why are the concepts of own and cross-price elasticity's of demand essential to competitor identification and market definition?

The amount of consumer responses to changes in a product market's price is measured by the own-price elasticity of demand, this equals the percentage change in a product market's sales that outcome from a 1 percent change in the price. If an industry raises its price and as a result of the price change it loses most of its clientele to another manufacturing, we can see that the market under consideration faces close product market competition with other product markets, because people will prefer to purchase what is more economical for them hence the cheaper product will sell more than the more expensive product. By measuring the own-price elasticity of demand the results tells us if a product faces close substitutes, but with knowing this it does not classify what those substitutes might be. We can identify substitutes by measuring the cross-price elasticity of demand between two products, where product X and product Y are known. The cross-price elasticity measures the percentage change in demand for the good Y that comes from a 1- percent change in the good X. So the higher the cross-price elasticity of demand is then the more willingly a consumer will be to substitute between two goods when the price of one good is increased and vice versa.

Question 2:

How would you characterize the nature of competition in the restaurant industry? Are there submarkets with distinct competitive pressures? Are there important substitutes that constrain pricing? Given these competitive issues, how can a restaurant be profitable?

The restaurant industry can be expressed as a monopolistic competition, because it is a restaurant there are numerous sellers in the market but each seller is slightly differentiated from the rest. A restaurant can be directly differentiated by the brand or type of food its serves, the quality of the food, the service, the special atmosphere or mood, the d├ęcor and where the restaurant is situated. The prices that can be charged for these differentiating features are controlled by a big part in terms of the geographic position of the restaurant and the local competition. Most consumers tend to not travel long distances for their meal, despite if the product is unique or no matter how differentiated the product is. Consumers will consider the convenience of the location alongside the price of the meal, so meaning cross-price elasticity of demand could be high. Some substitutes to restaurant meals are home prepared meals as well as frozen dinners. The restaurant will be cost-effective if it has a better location where it is accessible for most of the consumer's i.e. in the town centre. If this is not possible then a restaurant can

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