Business Profit and Consumer Price Sensitivity

Journal of Business and Economic Management, Vol. 2, No. 6, (2014), 84-96.

35 Pages Posted: 21 Oct 2011 Last revised: 25 Mar 2015

See all articles by Yufen Fu

Yufen Fu

Tunghai University

George Blazenko

Simon Fraser University (SFU) - Finance Area

Freda Eddy-Sumeke

Simon Fraser University (SFU) - Finance Area

Date Written: November 1, 2012

Abstract

In this paper, we investigate the relation between business profit and the demand price-elasticity of consumers. Business profit increases with a decrease in customer price-sensitivity only when the relation between a firm’s net operating margin (after fixed-costs) and its price-cost margin (before fixed-costs) exceeds unity. We find this result empirically for firms in five industries that we investigate. However, we also find that advertising increases customer price-sensitivity. Nonetheless, businesses advertise because the positive profit impact of higher unit sales offsets the negative profit impact of greater customer price-sensitivity to increase profit on net. We conclude that the increase in customer price-sensitivity from advertising is not purposeful and that businesses cannot manipulate consumer tastes for higher profit.

Keywords: Business profit, estimating customer price-sensitivity, advertising

JEL Classification: D11, D12, D21, D22

Suggested Citation

Fu, Yufen and Blazenko, George W. and Eddy-Sumeke, Freda, Business Profit and Consumer Price Sensitivity (November 1, 2012). Journal of Business and Economic Management, Vol. 2, No. 6, (2014), 84-96. . Available at SSRN: https://ssrn.com/abstract=1946921 or http://dx.doi.org/10.2139/ssrn.1946921

Yufen Fu

Tunghai University ( email )

Taichung 407
Taiwan

George W. Blazenko (Contact Author)

Simon Fraser University (SFU) - Finance Area ( email )

Burnaby, British Columbia V5A 1S6
Canada

Freda Eddy-Sumeke

Simon Fraser University (SFU) - Finance Area ( email )

Burnaby, British Columbia V5A 1S6
Canada

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