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Inelastic Demand
There are many factors that can contribute to the inelasticity of products, including the current stage in the product lifecycle, the price elasticity of the industry the product is a part of, the number of substitute products, number of competitors, cost structures of product, structure of distribution channels and the state of distribution strategies, and the level of differentiation in the product itself. In short, the progression of a product through its lifecycle and the many influences that exert pressure on demand for both substitute and competitive products directly influences the elasticity of a product (Thompson Learning 2007). By definition elasticity refers to the change in demand for a product given a per unit change in price. According to (Thompson Learning 2007) price elasticity of demand is the percentage change in quantity demanded given a percent change in the price. The high-tech and consumer electronics industries have literally thousands of products that become price inelastic relatively quickly. Many industry analysts tracking these industries credit the accelerated product lifecycles of these products. In reality many of these electronics products have very rapid sales curves that initially ramp and only a select few will jump from being niche to mainstream products. When products mature rapidly in the face of additional competitors and increasing attractiveness of alternatives, price inelasticity sets in quickly. When a product has become price inelastic, companies may drop the price 40% or more hoping to find a new price elasticity curve on which to complete on. This strategy rarely works, forcing companies to create entirely new generations of product rapidly in order to gain pricing elasticity in their industries by having superior benefits delivered with their products. Price inelasticity, in the short-term however forces many companies to pursue promotional and distribution strategies to compensate for the lack of volume increases based on price reductions.
Reference:
Thompson Learning (2007) - From lectures at the German University of Cairo, MBA Program, based on Chapter 5 of the South-Western/Thompson Learning book. Accessed from the Internet on July 21, 2007 from location:
http://mgt.guc.edu.eg/MBA/documents/global_economics/Chap05.pdf
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