Price Elasticity of Demand

Elasticity is estimated per item, category and market, and it is not a fixed property of a product. It shifts with the gap to the competitor's price, the season, how much the shopper already has at home, and how visible the item is in the basket. Retailers use it for two separate decisions: how deep a discount has to go before volume moves, and how far a regular price can rise before volume follows.

• Formula: E = (ΔQ / Q) ÷ (ΔP / P) – percentage change in quantity divided by the percentage change in price
• |E| > 1, elastic: volume reacts more than proportionally, so a lower price can still earn more revenue
• |E| < 1, inelastic: volume barely moves and the discount comes out of margin
• Cross‑price elasticity: how one item's volume responds to another item's price – the number that decides whether a price move grows the category or only shifts demand inside it

Price elasticity in practice

A coefficient is only as good as the sales history behind it, and retail history is rarely clean. Two distortions pull in opposite directions. A stockout inside the discounted week caps the volume that could have been sold, so the item comes out looking less elastic than it is and the next discount is set deeper than necessary. A promotion does the reverse: it bundles the price cut with leaflet space, secondary placement and forward buying, and if all of that uplift is attributed to price, the item looks far more elastic than it will be when only the shelf price changes. Where leaflet promotions dominate the calendar, an item can go for months without a clean regular‑price observation, so its elasticity ends up estimated on promotional weeks and then applied to everyday pricing. Response is also asymmetric: shoppers punish an increase harder than they reward a cut of the same size, which a single coefficient hides.

Logio therefore estimates elasticity on demand history cleaned of stockout periods and split into baseline and promotional demand – the same data foundation that forecasting needs. Veritico PRICE turns the coefficients into regular price and markdown decisions, Veritico PROMO handles the promotional side: see unified pricing and markdown management and promotion planning and effectiveness. At Jednota Mikulov, STOCK and PRICE ran together and availability rose from 96 % to 98 % – which is also what makes the price data usable in the first place; Kofola reached 76 % promotion forecast accuracy on separated baseline and promotional demand.

Related terms

• Promotion planning
• Stockout
• Demand forecasting
• Assortment optimization
• Demand planning
• Forecast accuracy