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Estimates of cross price elasticity of demand can be used in a number of ways. Firms may use XED estimates when trying to calculate the likely impact on demand for their product of a change in price in some related product. For example firms such as Gillette who sell complementary products such as razors, blades and shaving foam will use XED estimates when considering changing the price of these products. They will also use XED when trying to estimate the impact on their sales of a change in the price of a rival’s products.
Governments also routinely use estimates of XED in their decision making. For example when considering the imposition of an indirect tax on a product the government will not only consider the impact of the tax on the actual product but will also use XED to estimate the likely impact of the tax on substitute and complementary products. The government may also use XED estimates when trying to determine the degree to which a firm has monopoly power.
lydiajane74 answered the question on July 4, 2018 at 09:36
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