Cross-Price Elasticity of Demand
A measure of how the quantity demanded of one good changes in response to a price change in another good.
What is Cross-Price Elasticity?
Cross-price elasticity of demand measures the responsiveness of quantity demanded for good A when the price of good B changes, calculated as the percentage change in quantity demanded of A divided by the percentage change in the price of B. A positive value indicates substitutes — when the price of one rises, demand for the other increases. A negative value indicates complements — when the price of one rises, demand for the other falls. A value near zero suggests the goods are independent. Cross-price elasticity helps firms predict demand shifts and understand their competitive landscape.
Example
When Netflix raised its monthly subscription price in 2023, analysts observed a measurable uptick in sign-ups for rival streaming services such as Disney+ and Max — a positive cross-price elasticity indicating that these platforms are substitutes. Conversely, rising gasoline prices tend to reduce demand for large SUVs, demonstrating negative cross-price elasticity between complements.