Cross elasticity

The concept of cross elasticity is also equally important in business decision making.It is important for the firm to be aware of how the demand for its product is likely to respond to change in price of other goods.This information is necessary for formulating firm's own pricing strategy and for analysing the risk associated with various products.This is particularly important for the firms with extensive product lines,where significant substitution or complementary inter-relationships exist between the various products.
The use of cross elasticity are as follows :

1. Pricing strategy related to own product :A firm may produce several related products.For example,Everest Toothpaste produces both brush and tooth paste.These goods are also complements.Hence more tooth paste can be sold if the price of toothpaste is reduced.Likewise,Everest brewery ltd.produces San Miguel and Tiger beer.
2. Pricing strategy related to others product:Several firms in the country produce complementary goods and substitute goods.The price of one firm affects the demand for other firms product.If a having many rivals producing substitute goods raise price,it many have to lose the customers substantially.Hence,an analysis of cross elasticity between own products and rivals products is essential to design appropriate pricing policy.
3. Measure interrelationship between industries:The cross elasticity is used in industrial organization to measure interrelationship among industrial.For example,one firm be the sole supplier of a particular product in the market.But if cross elasticity between the firm's product and products of related industries is large and positive,the firm through a monopolist in a narrow sense,will no be able to raise its prices without losing sales to other firms in related industry.
4. Classification of industries :The cross elasticity is useful in determining the boundaries between industries.Sometime problem occurs as to which firm should be included in which industries.For example,whether the production of car and truck should be classified as one industry or two industries.The cross elasticity become a basis situation.The firms having high positive cross elasticity should be included in one industry in other industry.
5. Classification of goods and markets :The goods markets are classified on the basis of elasticity of demand.For example,the goods are classified into substitute goods and complementary goods on the basis of cross elasticity of demand.If the cross elasticity between two goods is positive,these goods are substitute.On the other hand,if the cross elasticity is negative,these goods are complementary.

Prof.Bain has classified market structure on the basis of cross elasticity.In how view,if the cross elasticity is infinite,the market structure is perfectly competitive.Likewise,if the cross elasticity is high or these are existences of substitute,the market structure is imperfect.