Empirical findings

    Empirical studies show that price and income elasticities tend to vary considerably

between different goods and services. In general, price elasticities for food,

fuel, health and housing services are found to be low ; while price elasticities

of demand for clothing, communications and purchased transport tend to be

high . Even at this broad level of generality, there are sharp differences in elasticity values for the same products across countries. Elasticities are also sensitive

to the precise specification of the product. The price elasticity of demand for

haddock has been estimated at 2.2, much higher than the price elasticity of fish

and higher still than the elasticity of food._7 Services have been found to have a low price elasticity in general, but individual items have much higher elasticities, such as recreation. Within recreation, the price elasticity of demand for movies has been estimated at 3.7

    Income elasticities tend to be higher than unity for books, health services, communications,consumer durables and recreation, while significantly below unity

for food .A selection of estimates for service industries is provided in Table 4.2.

    A detailed study of car ownership and use in Britain provides further insights

into the usefulness of elasticity estimates._9 A summary of the short-run and longrun

demand elasticity values for the income, motoring cost and bus fare variables

with respect to ownership and use of automobiles is given in Table 4.3. The

dependent variables are per capita car ownership and per capita car use. Annual observations were taken for the period 1953_–_96. To explain movements in car

ownership and car use, a number of determinants (independent variables) were

tested including.Five alternative estimation methods were used to estimate these relationships.

    Income elasticities are positive – the higher the income, the more cars are owned

and used. As economic theory would suggest, the long-run income elasticities are

greater in absolute value than their short-run counterparts. Cars emerge as a

luxury good in the long run, a finding that is consistent with simple observation

of the increasing congestion on British roads as people become more prosperous.

Car use income elasticities are greater in absolute values than the corresponding

car ownership elasticities – adjusting car use is easier than adjusting car ownership.

Motoring costs can be interpreted as a proxy for the ‘own’ price of car ownership

and use, and hence increases in costs have an expected negative effect on demand. Bus journeys are substitutes and an increase in bus fares has a positive effect on

demand for car ownership and use. The size of this effect is surprisingly large, but

surprises are not uncommon in empirical studies of this nature.

Econometric estimation rarely ‘lets the statistics speak for themselves’. Quirky

and idiosyncratic results are not unusual and the researcher who is frank about

them deserves credit rather than censure. There is a danger of trying too hard to

find estimates which the researchers will consider ‘plausible’ and accord with

‘intuition’ based on economic theory.

    Finally, some further warnings about the reliability of elasticities should be

noted. Most elasticities are estimated on the basis of historical experience. They

may prove to be unstable, since the past is not always the best guide to the future.

Also, elasticities are defined in relation to a particular market but, as we have seen,

the relevant market segment has to be found by careful analysis. The manager of a

football stadium, for example, may find that different groups have quite different

price elasticities, depending on how stadium seats are organised and segregated.

Similarly, a theatre or a hotel will explore opportunities for segmenting the

market .From a revenue-maximisation point of view, the more degrees of segregation the better. Another important point is that markets are

dynamic entities. Demand for products can be cyclical, leading to systematic

changes in elasticity values over time. Sometimes, though rarely, the advent of a

new product can lead to an increase in demand for a product which is consumed

jointly with it, such as happened to the cassette market following the success of

the Sony Walkman. Elasticities change in value over time. Markets are evolutionary,

not static. Finally, businesses that are interested in elasticities of a much narrower

segment of the market than is amenable to standard econometric analysis

will have to resort to more informal estimation methods.