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Downward pressure on price (including commoditisation)

For business commodities, auctions on business-to-business exchanges (e.g. Emiliani, 2001) 

can also have a similar effect of driving down price. Many companies, such as GlaxoSmithKline 

(pharmaceuticals), Whitbread (entertainment and leisure) and DaimlerChrysler (automo-

tive), have reported that price has been decreased by 10% or more using reverse auctions. 

Price elasticity of 

demand

Measure of consumer 

behaviour that indicates 

the change in demand 

for a product or service 

in response to changes 

in price.

Box 8.4

Price elasticity of demand

Price elasticity of demand assesses the extent to which a change in price will influ‑

ence the demand for a product. It is calculated as the change in quantity demanded 

(expressed as a percentage divided by the change in price as a percentage). Different 

products will naturally have different coefficients of price elasticity of demand depend‑

ing on where they lie on the continuum of consumer tastes from relatively undifferenti‑

ated commodities to luxury, highly differentiated products where the brand perception 

is important.

The formula for the price elasticity of demand is:

 

% Change in Quantity Demanded

Price Elasticity of Demand coefficient = –––––––––––––––––––––––––––––––

 

% Change in Price

Price elasticity for products is generally described as:

● 

Elastic (coefficient of price elasticity > 1). Here, the percentage change in quantity 

demanded is greater than the percentage change in price. In elastic demand, the 

demand curve is relatively shallow and a small percentage increase in price leads 

to a reduction in revenue. On balance overall, when the price is raised, the total rev‑

enue of producers or retailers falls since the rise in revenue does not compensate 

for the fall in demand and when the price is decreased total revenue rises because 

the income from additional customers compensates in the decrease in revenue 

from reduced prices. Figure 8.22 shows the demand curve for a relatively elastic 

product (price elasticity = 1.67).

● 

Inelastic demand (coefficient of price elasticity < 1). Here, the percentage change 

in quantity demanded is smaller than the percentage change in price. In inelastic 

demand, the demand curve is relatively steep and a small percentage increase in 

price causes a small decrease in demand. On balance overall revenue increases as 

the price increases and falls as the price falls. Figure 8.23 shows the demand curve 

for a relatively inelastic product (price elasticity = 0.3125).

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Chapter 8  Digital marketing

Purchase of some products that have not traditionally been thought of as commodities may 

become more  price-  sensitive. This process is known as  ‘

commoditisation

’. Goods that are 

becoming commoditised include electrical goods and cars.