Usefulness of XED na

Usefulness of XED na

1. Firms

   • Substitutes: XED>0
     • E.g XED >1 : Close substitutes
       • 1) Pricing strategy
         • E.g competitors ↓ price to ↑ sales, businessman follow suits & ↓ price
         • Keep an eye on pricing policy of competitors
       • 2) Marketing strategies
         • Offering specialised services. E.g free gifts
         • Product differentiation
           • E.g Brand loyalty through aggressive advertising
         • Efficient Services
           • E.g Faster packaging services
         • To ↓ XED → ↓ vulnerability to competitors' promotion
   • Complements: XED < 0
     • E.g XED <-1 : Strong complements
       • Estimate the Δ in P of a complement will have on their TR
         • E.g ↓ price of Car will result in a large ↑ in dd for Car accessories
       • Adjust price & output
         • E.g price of a closely related good ↓, businessman ↑ price of his product w/o ↓ in TR
         • E.g Car accessories firms will ↑ SS with a ↓ in price of car
       • Package 2 complementary goods together
         • E.g Car retailer offers free UV protection Window Films
   • Help firms identify its close substitutes and complements

2. Govt

   • Effects on Taxes
     • E.g XED negative & high: close complements
       • E.g fuel vs private cars
         • Access how much in ↑ fuel price will result in desired ↓ in DD for private transport
   • Effectiveness of Subsidies
     • E.g XED positive & high: close subsitites
       • E.g private cars vs public transport during non-peak hours
         • ↑ subsidies on public transport, ↓ C of private cars
     • E.g XED negative & high: close complements
       • E.g Sporting lifestyle vs sports training
         • ↑ DD for sports, ↓ price of sports training
           • e.g ActiveSg

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