Price Elasticity. You are advising the stakeholders of a small firm that is one

Question

Price Elasticity. You are advising the stakeholders of a small firm that is one of a handful of manufacturers of disposable contact lenses, wetting solution, and other products related to eye care. The stakeholders are wrestling with a proposal to implement a price increase for some, all, or a large number of their products. They all agree that doing so can help offset recent cost increases the firm has experienced, but there the agreement ends. Some favor a small price increase for products across the board, noting that, from the standpoint of the market, demand for healthcare products is relatively inelastic. Others believe that strategy could backfire, hurting more than helping. Instead, they argue, there are a number of factors to consider—the strength of the economy, their competition, trends in the market for specific types of products, and so on. They believe, therefore, products or types of products should be considered on a case-by-case basis: while a price increase for one product might yield positive results, a price increase for another might wipe out any gain achieved by the first. What would you say to these stakeholders? Formulate your advice, drawing on course readings, other scholarly sources, and the concept of healthcare price elasticity.

Explanation / Answer

THE ELASTICITY OF DEMAND

The elasticity of demand is a measure of the responsiveness of the quantity of a product demanded to changes in one of the factors that affect such demand. prod-

We could think of price –elasticity, Income-elasticity or cross-elasticity (responsiveness with reference to demand for other related products) .

This is a useful measure to compare the relative changes across products and countries or groups

Elasticity of Demand for Health Care in General

It has been consistently established over several independent studies that the demand for health care is inelastic. Several methods of estimation and wide variety of data base have time and again showed the price –elasticity of health care in general is approximately 0.17%, meaning the at a 1% increase in price reduces demand by 0.17% only. Similarly the income elasticity of demand for health care is also found to be inelastic. The estimates range from 0 to 0.2 %

Elasticity of Demand for Specific Classes of Health Care

Services

But the heart of the elasticity paradigm is that specific health care services and products have different levels of elasticity. In other words these services are more responsive to price changes and price levels. The real reason for elasticity’s of this nature is in fact the availability of substitutes. Medical care services and products that have substitutes are likely to be more price elastic than others. Preventive care has high elasticity, because people can opt for nutritional foods and vitamin supplements rather than preventive care.

Should the company increase prices of contact lenses and wetting solutions and other connected products across the board?

Answer:

Contact lenses are considered more of a type of beauty product than a health care product. The closest substitutes are of course the spectacle frame and lenses arrangement. Several market surveys have shown that users feel a variety of irritable symptoms sometimes leading to infection if the eye-region after the use of contact lenses. Even ophthalmologists wear spectacles rather than contact lenses. These are used occasionally by young women in particular for special occasions. Though there is a certain amount of convenience in the use of contact lenses, the downside is constant discipline and care of the product , which sometimes many users find cumbersome. We must therefore advise the company that the elasticity of demand for their product is quite high and the profitability and total revenues are likely to suffer adversely if prices are raised across the board. Sine lenses and wetting solutions are complementary raising price of either one of them will also affect demand.

When the company has suffered an overall cost increase the immediate argument is generally to raise the product prices. However, this is not eh best approach. It would be better to change the marketing strategies to position the products in a different manner. For example if in some geographical segments or in some groups or income areas the product has acceptability as a beauty aid, rather than a medical aid, the positioning has to change. Non-price strategy is certainly more rewarding than price strategies in a price sensitive market.

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