Did you know that your browser is out of date?
For the best experience we recommend upgrading to the latest version of these supported browsers:
I wish to continue viewing on my unsupported browser
Unlocking the Power of Prices: Why Demand Elasticities Matter and How to Properly Estimate Them
02 October 2023
Daniel Hanson, Dr. Francis Ostermeijer, Dr. Tuba Toru Delibasi, David Liedig
The price elasticity of demand is a crucial factor in pricing decisions, litigation, and policymaking. It determines the impact of pricing decisions on sales volumes, profit margins, and behavioural responses. However, estimating demand elasticities accurately is challenging, and there are several approaches to doing so.
In this white paper, Managing Director Daniel Hanson, Consultants Dr. Francis Ostermeijer and Dr. Tuba Toru Delibasi, and Research Officer David Liedig apply the textbook concept of price elasticities of demand to the real world, highlighting the role of demand elasticities in pricing decisions, litigation, and policymaking and the potential costs of getting it wrong. The authors provide insight into the challenges of obtaining credible demand elasticities by:
- Drawing a clear distinction between market, firm, and product price elasticities;
- Explaining whether and how to incorporate competitor prices; and
- Shining light on what economists mean by simultaneity bias between demand and supply—an essential consideration to ensure price elasticities are correct.
The authors conclude by outlining actionable solutions economists have devised to estimate elasticities properly and the importance of doing so.