Market analysts often use cross-price elasticities to determine a measure of the competitiveness of a particular good in a market. How might cross-price elasticities be used in this manner? What would you expect the cross-price elasticity coefficient to be if the market for a good was highly competitive? Why?

Cross- price elasticity is defined as the relative change in the quantity demanded of one good due to the relative changes in the price of others. If the value of the cross-price elasticity coefficient is high, then a one percent increase in the price of a good, will alter the demand of other goods by a relatively higher amount. It is a good measure used by market analysts to measure competitiveness. High cross-price elasticity indicates that a firm faces high competition which means a small change in price by any firm might alter the demand of a firm by higher quantity.

A value of cross-price elasticity coefficient more than zero shows that goods are substitutes for each other. If the value is zero, then goods are unrelated and if value is less than zero, then goods complement each other. A value of cross-price elasticity coefficient approaching 1 will show the goods are highly competitive.