Editing Cross elasticity of demand (section)

== Application and Implication ==
An enterprise needs to understand the cross-elastic demand for a product or service. 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. Large profits on complementary products can make up for net losses in the business of its main products. Many large companies use this strategy, such as Sony. Sony's PlayStation consoles are sold below the cost of making them, encouraging the sale of games. Games and consoles are almost perfectly complementary. The reduction in the price of consoles will significantly increase the demand for games. As a result, Sony can make up for its net losses in the console business by making big profits in games <ref>{{Cite journal|last=LIU|first=HONGJU|date=2010|title=Dynamics of Pricing in the Video Game Console Market: Skimming or Penetratio |journal=Journal of Marketing Research|volume=47|issue=3|pages=428–43|doi=10.1509/jmkr.47.3.428|jstor=25674441|s2cid=153931398}}</ref>

Besides, unique and irreplaceable products enable companies to sell their products at higher prices. Because of the uniqueness of the product, companies do not worry too much about consumers switching to other products. However, the specific price setting should also follow the demand curve of the commodity. Suppose the elasticity of demand for the product is greater than 1. In that case, it means that a slight change in the product's price will cause a significant reduction in the consumer demand for the product. Therefore, companies should first make a careful study of the elasticity of demand for their products before setting prices. It ensures a broader profit range for the company. A real-life example is Apple. Apple used iOS, which is different from Android, at the beginning of the launch of their phones. The clean and straightforward interface is an irreplaceable advantage of this system. Apple, meanwhile, has its unique text-message tone and call ringtone. In many small ways, Apple is building uniqueness. 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. The company can reduce the sensitivity of competitors' products by increasing customer loyalty. For example, the recently hot quality stars are invited to endorse their company's products. It can attract some of the star's loyalists to the product, thus increasing the overall loyalty. Alternatively, the company could spend more money on advertising to make consumers aware of the difference between its product and that of its competitors.

=== Contribution to policy improvement===
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.<ref>{{cite journal |title=Estimation of own and cross price elasticities of alcohol demand in the UK—A pseudo-panel approach using the Living Costs and Food Survey 2001–2009 |journal=Journal of Health Economics |date=1 March 2014 |volume=34 |pages=96–103 |doi=10.1016/j.jhealeco.2013.12.006|last1=Meng |first1=Yang |last2=Brennan |first2=Alan |last3=Purshouse |first3=Robin |last4=Hill-Mcmanus |first4=Daniel |last5=Angus |first5=Colin |last6=Holmes |first6=John |last7=Meier |first7=Petra Sylvia |issue=100 |pmid=24508846 |pmc=3991422 }}</ref> 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. For example, the cross elasticity of demand for wine in respect to the price change of spirit is 0.05, which implies that a 1% price decrease for Spirit will reduce market demand for wine by 0.05%. 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.

===Contribution to the sustainable supply chain===
A high coefficient of negative cross-price elasticity implies that the sales of product A are decided by the sales of product B. If the demand of A significantly depends on the demand of B, there must be a reduction in the profit of A. In this case, the cross elasticity of demand is a reminder to the firms to cautiously selecting products with high dependence on complements. On the other hand, the high-positive cross elasticity of demand reflects high substitutability of goods, which means customers' demand can be fulfilled by other products easily. 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.

===Contribution to firm reactions===
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. Firms can develop strategies to reduce their exposure to the risks they are imposed to by price changes of other firms, such as an increase in the price of a complement or a decrease in the price of a substitute.<ref>{{cite web |title=Cross elasticity of demand |url=https://www.economicsonline.co.uk/Competitive_markets/Cross_elasticity_of_demand.html |website=Economics Online |access-date=26 April 2021 |date=13 January 2020}}</ref>

=== Potential strategies ===

==== Horizontal integration ====
In markets with few competitors, cross elasticity between rivals are likely to be high,<ref>{{cite web |title=Cross elasticity of demand {{!}} Economics Online {{!}} Economics Online |url=https://www.economicsonline.co.uk/Competitive_markets/Cross_elasticity_of_demand.html |website=Economics Online |access-date=26 April 2021 |date=13 January 2020}}</ref> this makes firms in the market vulnerable to [[price competition]]. Horizontal integration, usually [[mergers]], could reduce said risks by reducing competition in the market. 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.<ref>{{cite news |title=SABMiller agrees AB Inbev takeover deal of £68bn |url=https://www.theguardian.com/business/2015/oct/13/sabmiller-agrees-ab-inbev-takeover-68bn |access-date=26 April 2021 |work=the Guardian |date=13 October 2015 |language=en}}</ref> The takeover created a brewing empire that produces a third of the world's beer.

==== Vertical integration ====
Firms may gain better control of the market by merging with suppliers of complementary products. Developing their own complementary products is another possible solution. For example, Google developing [[Google Pixel]] is an attempt by Google to capture the smartphone market share by integrating both its software and hardware features for improved performance while being more resource efficient.<ref>{{cite web |last1=Inc |first1=Spiceworks |title=Snapback: Google Pixel and the move towards vertical integration |url=https://community.spiceworks.com/topic/1860664-snapback-google-pixel-and-the-move-towards-vertical-integration |website=The Spiceworks Community |access-date=26 April 2021 |language=en}}</ref>
[[File:Google Pixel and Pixel XL smartphones (30155267665).jpg|thumb|Google Pixel and Pixel XL smartphones]]

==== Alliances and collusion ====
Competitors may pool resources to create a joint alliance, such as [[Sony-Ericsson]] in October of 2001. [[Sony Electronics|Sony]] had a share of less than 1% in the mobile phone market; while Ericsson was the third largest market share holder. Unfortunately, [[Ericsson]] relied heavily on a single supplier, and when a fire broke out at a [[Royal Philips Electronics|Phillips]] factory, Ericsson couldn't fulfill their orders. Sony wanted a greater market share and Ericsson wanted to avoid going out of business, hence the Sony-Ericsson joint venture was formed.<ref>{{cite web |title=History of sony ericsson as a company |url=https://www.auessays.com/essays/business/history-of-sony-ericsson.php |website=AUEssays.com |access-date=26 April 2021 |language=en}}</ref>

Firms entering into a price fixing agreement in order to avoid [[price wars]] means they are involved in a [[collusion]]. The chances of collusion to occur is higher in markets with few competitors such as [[Oligopolistic|oligopolistic markets]]. It is illegal according to [[antitrust laws]], even though collusive agreements may be implicit, its implication with cartels are the same.