Interesting Results

Price Elasticity is Increasing

Price elasticity refers to the extent to which a change in price results in a change in the quantity sold. Typically, a decrease in price is expected to lead to an increase in sales and a price increase is expected to lead to a sales decrease, but the magnitude of the change varies from one product to another.

A 2005 study¹ shows that the magnitude of price elasticity has been changing over time. A 2005 review of a large number of published price elasticity studies found that on average, price elasticity has increased since the last major review of a similar type conducted in 1988. In the 1988 review, a 1% increase in price was associated with a 1.76% drop in sales, but that increased to a 2.62% drop in the 2005 review, suggesting that consumer buying patterns have become more sensitive to price increases and decreases.

Both reviews showed price elasticity to be greater for durable goods than for non-durables. Unlike the 1988 review, the 2005 review found no differences in price elasticity among studies done in different parts of the world, but it did find that greater rates of price inflation are associated with greater rates of price elasticity.

¹ Bijmolt, Tammo H.A., Harald J. van Heerde, and Rik G.M. Pieters (2005), “New Empirical Generalizations on the Determinants of Price Elasticity”, Journal of Marketing Research, 42(2).