An increase or diminution of prices affects buyers, competition, distributers and suppliers; it can also get to interest the government and, by all means, to the company. Its success depends on how they respond the affected parts. Nevertheless, she is one of the matters most difficult to predict and its decision involves great risks.

19.1. The effects on the own product

Reactions of the buyers to the change of price. The answer of the buyers to the change of price we can measure it by means of the elasticity of the demand to the change of price:

 

εx, Px = Relative change of the amount = Δx/x Relative change of the price Δp/p

We suppose that the good is normal; that is to say, a curve of demand with negative slope, and that therefore, when increasing the price, diminishes the demanded amount.

An elasticity of equal price to one means that the sales raise (or they lower) in the same percentage that the low price (or it raises). In this case the total entrance will not be affected.

An elasticity superior to one means that the sales (x) raise (or they lower) in greater proportion than the low price (or raises). In this case the total income raise. An elasticity inferior to one means that the sales raise (or they lower) in smaller proportion the percentage in which the low receipt (or it raises). In this case the total income fall. Therefore, to know to the result or the effects of a variation of the price it is very important to know the elasticity.

It is difficult to measure the elasticity actually, because we were with great statistical obstacles. Also it is necessary to consider that the long term elasticity can be very different. Different techniques exist to measure it, as they are the direct study by means of samplings of the attitude of the buyers, the statistic analysis of the relation price/amount through an historical study or by analysis of cross-sectional sections of analogous markets. Tests can be also made of market by means of the restricted use to certain groups of the new price or with more complicated calculations of statistical inference through segmentations of the market and quantification of the partial results. The problem is not in calculating the stability index, but in knowing if he is sufficiently great (or small) throughout the sections of demand curve to that the magnitudes that are going away to handle, independent of the balance point talk about and taking care of the total answer of the market and not to the one of each and every one of the buyers.

19.2. The effects that it triggers on the competitors

The reactions to the change of price:

The reactions have individual importance when the number of companies tenderers is very small, when the product that is offered is identical and when the buyers are informed.

In a situation of monopolistic competition it is possible to be hoped:

1. That when a company lowers the price, they also lower it to the others.
2. That when a company raises the price, the others do not raise it.

19.3. The effects on other products

They are determined using the crossed elasticity, that is defined as the quotient between the relative variation of the demand of either against the relative variation of the price of another or.

εy, Px = Δy/y ΔPx/Px

 

• If εy_{, Px} > 0, the goods are substitute.
• If εy_{, Px} < 0, the goods are complementary.
• If εy_, approximated _Px to 0, the products are independent.

1. Substitutes. The company can obtain benefits get dearer a product, if it makes a substitute to the warm good.
2. Complementary. When increasing the price of either, diminishes the demand of or the complementary one.

When varying the company the price of a good, must consider to study the possible effects of that variation on the demand of the other products of the company.

In summary, we can say that the slope of prices as marketing strategy is usable only when the demand of the product is relatively elastic and the company do not jeopardize its yield; whereas the company when it initiates a rise of prices must know the possible answers the competition, since if it is chosen by her, it knows that the market is going to respond mainly if a leader exists who usually marks the directives at the time of fixing the prices and the conditions of sale, facilitating in this way stability to the sector.