Business Competitive Elasticity: An Equational Analysis of How Competitive a Business is in a Market
Author(s):
Dayne Davis
This paper introduces the Elastic Demand Index (EDI), a novel approach to analysing the competitive elasticity of businesses within a market. The EDI formula discusses the limitations of traditional demand elasticity models, such as Price Elasticity of Demand (PED) and Cross-Price Elasticity of Demand (CPED), by incorporating additional market factors that influence consumer behaviour. The EDI formula integrates Competition Intensity (CI), Market Influence (MI), Buyer Confidence (BC), and Consumer Sensitivity (CS) to provide a more comprehensive understanding of how various dynamics affect demand elasticity.
In addition to the EDI model, the paper also presents the Price-Perception Elasticity Index (PPEI), a variation of the EDI formula that incorporates the Van Westendorp Price Sensitivity Meter (PSM) to account for consumer price perceptions. The PPEI adjusts the EDI by introducing a Van Westendorp Price Factor (VW), which reflects the proximity of a product’s actual price to the customer’s perceived Optimal Price Point (OPP) and the Range of Acceptable Prices (ROP). This variation allows businesses to understand not only how external market conditions affect demand elasticity but also how closely their pricing aligns with customer expectations, adding a psychological dimension to the analysis of price elasticity.
Through a detailed exploration of the EDI and PPEI formulas and their components, the paper explores and demonstrates how these approaches offer a more nuanced analysis of market conditions, particularly for companies operating in competitive and rapidly changing environments. By incorporating factors such as competition, brand strength, consumer sentiment, and price perception, both the EDI and PPEI models allow businesses to predict demand changes more accurately. This enables firms to optimize pricing strategies, improve market positioning, and sustain profitability in complex markets by considering not only price fluctuations but also the broader market landscape and customer price perceptions.
The paper concludes that the Elastic Demand Index (EDI) and its variation, the Price-Perception Elasticity Index (PPEI), represent significant advancements in the field of economic analysis, providing a more holistic and practical tool for assessing competitive elasticity. By moving beyond the traditional focus on price and incorporating multiple dimensions of market behaviour, these models offer substantial advantages for businesses seeking to navigate the complexities of modern market environments and better align pricing strategies with consumer expectations.
