What does cross-price elasticity measure?

Cross-price elasticity measures the responsiveness of the quantity demanded for one product in relation to changes in the price of a different product. In essence, it helps to identify whether two products are substitutes or complements. If the cross-price elasticity is positive, it indicates that as the price of Product B increases, the quantity demanded for Product A also increases, suggesting that they are substitutes. Conversely, if the cross-price elasticity is negative, it signals that as the price of Product B rises, the quantity demanded for Product A falls, indicating that they are complementary goods.

This metric is crucial for businesses as it enables them to understand competitive dynamics in the market. For instance, if a company knows that its product is closely linked in demand with another product, it can strategize its pricing in response to that competitor's moves.

The other options do not accurately define cross-price elasticity. Seasonal changes pertain to fluctuations in demand over time, total revenue relates to the financial performance of a product, and the effectiveness of marketing campaigns is measured through different metrics altogether, such as return on investment or engagement rates.