Cross-price elasticity of demand

Cross-price elasticity of demand is the responsiveness of DEMAND for one PRODUCT or service to changes in the price of another good or service. Cross-price elasticity is calculated by dividing the percentage change in demand for one product by the percentage change in the price of a related product.

Exy = (% change in demand good X) /
(% change in price of good Y)

In most markets, managers can change price whenever they want. Managers of businesses selling related products will usually see a change in demand for their product in response to another firm’s price change. One easy example is hot dogs and hot-dog rolls. If the price of hot dogs increases because hot dog manufacturers begin using higher-quality meat in their products, by the law of demand, fewer hot dogs will be sold, and sellers of hot-dog rolls (commercial bakeries) will see a decrease in demand for their products. Using the cross-price elasticity formula, a 20-percent increase in the price of hot dogs might cause a 15-percent decrease in demand for hot dog rolls. The crossprice elasticity is –.15/.20 = –.75. As would be expected, the two products are complimentary goods, and the cross-price elasticity is negative. If the two products were substitutes, an increase in the price of one good would result in an increase in demand for the other good, and the cross-price elasticity would be positive. If the cross-price elasticity is zero, the two products are not related. Managers know changes in prices affect their business. Few small-business managers take the time to calculate the impact of price changes by other companies, but crossprice elasticity can be used to measure the degree of response to changes in prices of complements or substitutes for their products. This can be used in planning inventories, projecting sales, and developing PRICING STRATEGIES.
Examples of cross-price elasticity estimates include:

butter and margarine 0.67
natural gas and fuel oil 0.44
beef and pork 0.28
cheese and butter –0.61