Price Elasticity Comparing the Price

Price Elasticity

Comparing the price elasticities of two products, the first having price elastic demand, and the second having price-inelastic demand, followed by an assessment of their respective implications for total revenue are discussed in this analysis. For purposes of this analysis, the price-elastic products are high-end cotton women's apparel which has shown to consistently have a high degree of price elasticity from previous studies (Fadiga, 2003,136-142). The price elasticity of these high-end cotton women's products has persisted for many decades and now pervades the industry's value chain as a result (Shahnawaz, 2004, 74-84). The inelastic product included in this analysis is children's toys. The accumulative effects of mass merchandisers including Wal-Mart sustaining years of price wars in this category of products have significantly impacted the price elasticity of this industry (Zimmerman, Pereira, Kim, 2003, et.al) by limiting the number of substitute products available by forcing consolidation of the toy industry. Paradoxically the reliance on branding within toys has worked to further inelastic pricing demand performance (Petropoulos, 2000, 135-138) while on high-end women's cotton apparel the use of branding to reinforce exclusivity (Oliveira-Castro, Foxall, Schrezenmaier, 2005, 309-335). Price elasticity for each of these product categories is also completely consistent with the length of typical purchase and use cycles as well. As has often been shown of industries that exhibit a high elasticity of demand, the purchasing cycles for high-end cotton women's apparel is significantly longer than that of a children's toy. There is also the implied reliability, durability and extended use of higher-end women's cotton clothing, with the highest-end garments deliberately designed to last several fashion generations. Toys on the other hand are highly seasonal and quickly become obsolete, further leading to their industry having a greater degree of price inelasticity.

Price Elasticity of Children's Toys

By definition price elasticity is defined by the sensitivity of product demanded based on a percentage change of its price (Sahay, 2007, 53). When a product's price change leads to an equal to a larger percentage change in demand, a product is considered to be elastic. In industries that have become more inelastic over time there is a continuing effort to define dynamic pricing models that seek to optimize price given demand for a specific product at a specific point in time (McAfee, Vera te Velde. 2008, 432-448). This price optimization approach to strategically attempting to create a demand curve (Docters, Durman, Korman, Schefers, 2008, 22-25) has been successful in services industries trending towards inelasticity yet have been marginally successful in toy manufacturing and distribution. The inelasticity of the toy industry is also specifically created in part by the very rapid product lifecycles and use of severe price discounting at the end of every toy season to quickly reduce inventories through distributors and retailers. In effect the toy industry is by nature highly inelastic due to the nature of its seasonality and approach to competition and differentiation. The one exception in the toy industry is the area of electronic games, which have just as rapid of product lifecycles, yet have greater differentiation and therefore price elasticity based on depth and complexity of content and programming. Overall however toys are inelastic given the nature of their industry, the role of mass merchandisers in re-defining the supply chains and pricing of the industry, and the inherent nature of short purchasing and consumption cycles of these products.

Price Elasticity of High-End Women's Cotton Apparel

Conversely the price elasticity of women's cotton apparel is high due to the length of purchase cycles for many of these items, the greater the degree of substitutes and the proportion of income required for these items (Fadiga, 2003, et.al.). In conjunction with these factors that are inherent in the industry's structure there are also the factors of differentiated brands with significant brand equity that further support and strengthen the price/quality relationship between products. As a result of all these factors, the demand curve for women's cotton apparel is often tightly managed within this industry (Docters, Durman, Korman, Schefers, 2008, 21-25) to ensure the highest levels of consistent profits are attained over the long-term. The exclusivity of these higher-end products and their cost structures also are deliberately now being created to ensure barriers to entry from mass merchandisers. The threat of a mass merchandiser dominating the supply chain and driving down costs to sell on brand equity alone continues to force marketers of key brands in this industry to concentrate on defensible differentiation. As a result of all these strategies and the inherent structure of this industry the price elasticity of high-end cotton apparel continues to be protected from becoming too price-inelastic over time.

Total Revenue Implications