Question

Callaway recently did a cross-price elasticity study of the quantity demanded of its new Rouge driver with respect to a change in price of the new driver by Taylor Made. The study showed a low plus coefficient. Thus, does Callaway have a lot of market power in pricing it new Rogue drive? Explain.

Answer 1

Cross price elasticity of demand shows the percentage of quantity change of one good in the response of percentage of price change of other good. Here the cross price elasticity is low but positive. The positive sign depicts that change is the quantity of new Rouge and price of other products are in the same direction or proportionate. That is if price of other products incresae then quantity of new Rogue drive will be incresed or vice versa. Low coefficient means quantity will not be changed much by the change of price of other goods. So Callaway has a market power as the coefficient is positive. But as the coefficient is low so does not have a lot of market power in pricing new Rogue drive.