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.
