Advertising and Cross-Advertising Elasticities

We know from the demand function that the quantity demanded of product X will be responsive to both the advertising in support of product X and the advertising in support of related products. The advertising elasticity of demand for product X measures

Table captionTABLE 4-5. Substitutes, Complements, and Cross Elasticity of Demand

Cross Elasticity	Relationship	Increase in P v	Decrease in P y
OO > T] > 0	Substitutes	Qx rises	Q, falls
T] — 0	Unrelated	unchanged	(2, unchanged
0 > T) > — OO	Complements	£) v falls	Qx rises

the responsiveness of the change in quantity demanded to a change in advertising budget expended for product X. We expect a positive relationship between advertising and quantity demanded, but we also expect that the responsiveness of sales to advertising will decline as advertising expenditure continues to increase. There will be a lower limit on the value of the advertising elasticity if advertising expenditure is not to be carried beyond an optimal level. We defer this issue until Chapter 13 where we will see that the critical value of advertising expenditure (and hence advertising elasticity) depends upon the profit contribution expected from each additional unit sold as a result of the advertising.

Cross-advertising elasticity measures the responsiveness of quantity demanded (sales) of product X to a change in the advertising efforts directed at another product, Y. We expect cross-advertising elasticity to be negative between substitute products and positive between complementary products. For example, increased advertising efforts for a particular movie would be expected to reduce the quantity demanded (sales) of admission tickets to other movies and attractions but to increase the sales of the refreshment kiosk in the lobby of that particular movie theater. In effect, the increased advertising would have shifted the demand curves to the left for all substitute attractions and would have shifted the demand curve to the right for the refreshment kiosk.

It is clear that we might calculate the elasticity of demand with respect to any of the independent variables in the demand function. Using the general concept of elasticities, we can construct the appropriate formula and measure any elasticity that may be useful for decision-making purposes.