Answer to Question #201653 in Microeconomics for Nitin

Question

Consequence

A 40 percent price reduction of The Times led to a 17.5 per

cent increase in its sales.

Price elasticity of demand for The Times: -0.44

Note: The revenue earned by The Times fell from

£169,576 to £134,689!

Competing papers suffered!

Independent suffered most, with a 15.2 percent loss of sales,

indicating a cross-price elasticity of 0.38

Cross-price elasticity for the Guardian was 0.11, and that for

the Daily Telegraph was 0.05.

 

Implications?

What do you expect would happen to the sales of The Financial

Times?

Why did The Times adopt a strategy of price cut?

Answer 1

Given, 

There was a 40% reduction in the price of The Times newspaper which resulted to a 17.5% increase in its sales. 

Earlier, the Price Elasticity of Demand for The Times was -0.44

There was a fall in the Revenue of the newspaper

However, due to the reduction in price, the other newspapers suffered.

Independent Newspapers had a 15% loss of sales with a cross price elasticity of 0.38

While the Guardian had a cross-price elasticity of 0.11 and The Daily Telegraph of 0.05

From the given data, we can see that The Times had a Price elasticity of Demand of -0.44. This meant that if there would be an increase in the price of the newspaper, the demand of the newspaper would decrease. 

Due to a cut in the price of The Times, Independent newspapers suffered the most with the highest cross price elasticity, which means that with the change in the price of another good, the demand for the independent newspapers would also be affected. Therefore, with a price reduction of The Times, people demanded more of The Times and less of other news papers such as the independent news papers or the Guardian or The Daily Telegraph.

Financial Times is a complement of The Times. As we know, the cross price elasticity of complementary goods is always negative. Therefore, as the price of The Times decreases, the demand for the second good increases. 

The Times adopted a price cut due to the fact that it had a negative Price elasticity of demand, i.e. -0.44, which meant that, with an increase in the price of the newspaper, there will be a decline in the demand. Therefore, as there was a price cute, the demand for the newspaper rose and the sales grew by 17.5%.