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Market elasticity

This topic for experienced GMC-players only, because information requires serious skills and background.

We have already understood how to test factors, now lets look at basic principles of market mechanic in the GMC simulator. Experienced players know that impact of demand factors to increase sales of their products is very different between groups with weak and strong competitors. In first rounds of the championship experienced teams have not got worthy opponents in the group and sales go up the hill. But in semifinal weak teams eliminated and teams begin a persistent struggle for the leadership. In this case, if we make the same decisions as in first rounds, sales will grow less. That is because elasticity of the demand factors decreased, competition in the group became stronger. Why it happens and how to forecast sales in future periods?

Previously, we estimated elasticities for direct and corporate advertising in 1 period for each scenario. But elasticity of demand factors is not constant and depends on the strength of competitors in the group. It means elasticity for elasticity of factors. Lets check price elasticity in 1 period on scenario 12C1 and 12C3.

 

Scenario 12C1

In this table you can see price elasticities for scenario 12C1 - relative % change in sales when price changes by 1%. For example, prices increasing for product 1 in Internet by 1% will decrease sales by -2.175%. Data was found from multiple perfect tests and can be used unconditionally.

ElasticityProduct 1Product 2Product 3
EU-3,186-1,927-2,449
Nafta-5,010-2,739-3,510
Internet-2,175-1,418-1,794

 

In this table sum of market shares of all companies according to marketing information in 1 period. Amount of shares for product 1 in Internet equal to 76.2, which means that the market is occupied 76.2% by your company and competitors in the group. Market load may vary depending on level of competitors in the group. In tests elasticity of product 1 in Internet ranged from 70% to 80%.

Market loadProduct 1Product 2Product 3
EU52,870,663,8
Nafta40,569,158,9
Internet76,284,681,8

 

Lets put prices elasticity and market load on graph. In the graph vertically - market load (EU - blue, Nafta - green, Internet - red). Horizontal - price elasticity in 1 period.

The higher market load, the lower price elasticity. This means that the same price change (for example, decreasing by 5 units) in weak group with lower market load you will get more sales growth than in the group with high market load.

 

Scenario 12C3

Lets do the same with price elasticity from scenario 12C3.

ElasticityProduct 1Product 2Product 3
EU-6,372-6,527-3,400
Nafta-6,372-6,527-3,400
Internet-3,774-3,172-1,924

 

Sum of market shares of all companies according to marketing information in 1 period.

Market loadProduct 1Product 2Product 3
EU20,620,149,9
Nafta30,429,662,6
Internet60,568,481,8

 

In the graph vertically - market load (EU - blue, Nafta - green, Internet - red). Horizontal - price elasticity in 1 period.

Analysis shows line points slight deviations from trend, market load also slightly differs between each other - the difference is about 5%, which is caused by average values of market shares in several test groups. We can conclude that probably market load in current period affects on demand factors in current period.

Compatible elasticity for each market from scenarios 12C1 and 12C3 on the same graph.

 

EU

 

Nafta

 

Internet

Taking into account estimate error of price elasticity and market load, there is no difference between scenarios. Elasticity is reduced in direct proportion to the market load. When you forecast sales, it is necessary to forecast market load changes to correct influence of demand factors.

We extend trend line to the intersection with axis OY. Continue trend line from scenario 12C1 (red) as the most clearly calculated.

 

EU

 

Nafta

 

Internet

 

Trend line crosses axis OY at 100. That means when trend reaches 100% market load, elasticity drops to 0. So to go beyond 100% is impossible, it is a natural mechanism that limits market expansion in GMC simulator.

Calculate elasticity of price elasticity for each market. For EU and Nafta I removed 2 points where was large error in estimation of market load. Add control point on axis OY - 0 elasticity, market load 100.

 

EU

 

Nafta

 

Internet

Elasticity of price elasticity for Nafta and Internet market is about the same 11.77 and 10.28. While elasticity for EU market is much higher 14.73.

 

Hints

  1. Elasticity of demand factors is directly proportional to the market load.


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