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Price Elasticity

Research on Magnitude and Determinants


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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4 Magnitude of Price Elasticity


In order to obtain a more comprehensive understanding of the magnitude of price elasticity both data sources, the academic publications (chapter 4.1) and the consulting projects (chapter 4.2), are utilized. The first step was to conduct a detailed study by study review in both areas to create a database on the magnitude of price elasticity. Detailed information on the price elasticities were recorded, particularly on the type of product and the brand, to enhance the current knowledge on the magnitude of price elasticities by being able to perform more detailed analyses, especially by product category.

For each study the reported price elasticities were identified and recorded including further information on product category, brand and brand sizes. This enabled the author to show a general overview of the price elasticity data (chapter 4.1.1) as well as more specific overviews by product category (chapter 4.1.2).

The academic data set consists of 863 price elasticities. The frequency distribution in figure 4-1 and the descriptive values are close to those of Bijmolt/Van Heerde/Pieters (2005). The mean price elasticity is -2.51 with a median of -2.21 and a standard deviation of 1.81. On average, the change in demand is two and a half times the change in price; given a 10% price reduction demand will increase by 25.1%. Half of the data (50.8%) lie between -1 and -3. ← 48 | 49 →

Figure 4-1: Frequency Distribution of Price Elasticities – Academic Data Set

The Amoroso-Robinson relation...

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