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2.3 OTHER ELASTICITIES 53

APPLICA TION 2.4
How People Buy Cars: The Although all of the cross-price elasticities are fairly

Importance of Price small, note that the cross-price elasticities between
compact cars (Sentra, Escort) and luxury cars (Lexus
LS400, BMW 735i) are zero or close to zero. This
Table 2.6 presents estimates of the cross-price elastici-
makes sense: Compacts and luxury cars are distinct
ties of demand for some of the makes of automobiles
market segments. Different people buy BMWs than
shown in Table 2.3. (The table contains the price elas-
buy Ford Escorts, so the demand for one should not
ticities of demand for these makes as well.) The table
be much affected by the price of the other. By con-
shows, for example, that the cross-price elasticity of
trast, the cross-price elasticities within the compact
demand for Ford Escort with respect to the price of a
segment are relatively higher. This suggests that con-
Nissan Sentra is 0.054, indicating that the demand for
sumers within this segment view Sentras and Escorts
Ford Escorts goes up at a rate of 0.054 percent for each
as substitutes for one another.
1 percent increase in the price of a Nissan Sentra.
TABLE 2.6 Cross-Price Elasticities of Demand for Selected Makes
of Automobiles
Price of Sentra Price of Escort Price of LS400 Price of 735i
a
Demand for Sentra 6.528 0.078 b 0.000 0.000
Demand for Escort 0.054 6.031 0.001 0.000
Demand for LS400 0.000 0.001 3.085 0.093
Demand for 735i 0.000 0.001 0.032 3.515

a This is the price elasticity of demand for a Sentra.
b This is the cross-price elasticity of demand for a Sentra with respect to the price of an Escort.
Sources: Adapted from Table VI in S. Berry, J. Levinsohn, and A. Pakes, “Automobile Prices in
Market Equilibrium,” Econometrica, 63 (July 1995): 841–890.

APPLICA TION 2.5

Coke versus Pepsi 15 Cola and Pepsi. 16 Using the average values of prices
and other variables in their study, we can infer the
If the price of Coke goes down, what is the effect on price elasticity, cross-price elasticity, and income
the demand for Pepsi? And if Pepsi’s price goes elasticities of demand for Coke and Pepsi shown in
down, how is Coke’s demand affected? Farid Gasmi, Table 2.7. 17
Quang Vuong, and Jean-Jacques Laffont (GVL) stud- As you can see in Table 2.7, the cross-price elas-
ied competitive interactions in the U.S. soft drink ticities of demand are positive numbers (0.52 and
market and estimated demand equations for Coca- 0.64). This tells us that a decrease in Coke’s price

15 This example is based on F. Gasmi, J. J. Laffont, and Q. Vuong, “Econometric Analysis of Collusive
Behavior in a Soft Drink Market,” Journal of Economics and Management Strategy, 1 (Summer 1992):
278–311. It was inspired by the classroom notes of our former colleague Matthew Jackson.
16 In Chapter 13, we will use these demand functions to study price competition between Coke and Pepsi.
17 GVL estimated these demand functions under several different assumptions about market behavior.
The ones reported here correspond to what the authors believe is the best model.