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Price Elasticity

Research on Magnitude and Determinants

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Evelyn Friedel

Price is a fundamental profit driver. It is by far the most sensitive profit lever that managers can influence. Very small price changes translate into enormous changes in profit. Price elasticity indicates how sensitively consumers react to price changes. Not only the knowledge about the magnitude of price elasticity, but also the knowledge about the determinants influencing the price reaction is essential. It is crucial for the development of a successful marketing strategy to understand how price elasticities vary with market and product characteristics. Reflecting the academic and managerial need, the objective of the research is to gain a comprehensive understanding in two main areas, the magnitude of price elasticity and the determinants of price elasticity.
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1 Aim of Research and Overview

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Price management has a high importance within the marketing field (Gijsbrechts 1993; Leone et al. 2012; Monroe 2003; Simon/Fassnacht 2009). The price indicates the ratio of “the quantities of money (or goods and services) needed to acquire a given quantity of goods or services” Monroe (2003, p. 5). The price response function and the price elasticity are the essential elements of pricing (Simon/Fassnacht 2009, p. 13). This view is supported by Kim/Srinivasan/Wilcox (1999, p. 173) who consider the price elasticity to be the most fundamental economic concept of pricing.

Figure 1-1 points out the central role of the price elasticity and its systematic context. The price and other determinants, such as product characteristics or the competitive environment, determine the sales volume which in turn impacts the revenue and the costs and thus in the end determines the profit. In order to make profitable pricing decisions, knowledge about customers’ price reaction is indispensable (Simon/Dolan 1997, p. 59).

Figure 1-1: Price Elasticity Representing the Core of Pricing





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