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We use the standard economics formula for calculating cross elasticity of demand relative to price.
This is generally expressed as:
Cross Price Elasticity Formula: ((original + new price of product A ) / (original + new quantity of product B)) * ((change in quantity)/(change in price))
The products are substitutes; demand for the second good increases when the price of the first good increases.
The products are potentially complements, goods that are consumed in conjunction with each other. Demand for the second good declines when the price of the first good is increased. This is likely in line demand for the original good, which we expect to decline when prices are raised.
Significant changes in the perceived quality of either product will affect cross price elasticity. For example, consider the competition between premium products and economy offers in consumer packaged goods. Both products service the same fundamental consumer needs. The relative sales between the two will be driven by consumer brand awareness, perceptions of quality, and broader trends in product design.
Understanding cross elasticity of demand has significant applications in the fields of pricing and economic policy, particularly trade policy. The availability of substitute products is a major determinant in the ability of a firm to set price. Products that need to compete against substitute products need to have pricing set at levels that support an appropriate market share. Similarly, understanding the degree to which products can be substituted by another national is a powerful indicator of the consequences of trade policies and likely responses. Products without viable substitutes can be sold at higher prices since cross elasticity of demand is less of a factor in determining their market share.
Identifying complementary goods is similarly useful in that you can set pricing in anticipation of future business. This is especially powerful when you're looking at opportunities to bundle complementary goods and services to a buyer who is particularly sensitive to certain items. For example, many buyers are price sensitive to the upfront cost of installing a piece of manufacturing equipment. Each of these platforms usually has a set of complementary products and services that will be pulled along by the initial purchasing decision: parts, accessories, maintenance services, consumable products, and financing. Bundle pricing can be used to get aggressive on the initial quote (the capital investment decision) and generate the bulk of your profits from the ongoing purchases required to maintain and operate that equipment.