The more necessary the product is the lower the

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The more necessary the product is, the lower the elasticity Price elasticity of demand = (percentage change in quantity demanded) ÷ (percentage change in price) Over 1 = 1 elastic demand Under 1 = Inelastic demand Inelastic demand is when consumers are not sensitive to prices. The change in quantity demanded is less than the change in price. Elastic demand - the higher the price is the lower demand is The percentage change in quantity demanded is greater than that of price This is what happened to Reebok, there price was too high and it lowered demand Reebok thought they had a Prestige Product Prestige products - products that have a high price and that appeal to status conscious customers Demand increases as price increases Demand decreases as price decreases 11.4.09 Mistakes made by Reebok 1. Price fixing charges by the federal government – reebok trying to inhibit competition which was illegal
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They had an oversupply of expensive shoes - they continued to produce even though they weren't selling Retailers wanted to mark down prices, but Reebok said no Cross Price Elasticity Measures the rate of response of quantity demanded of one good, due to a price change of another good. Substitutes: consumers purchase more of a good when the price of its substitute increases Price of Reebok went up, consumers bought Nike Complements: a price rise in one good causes the demand for both goods to fall Price of shoes increased, less socks were bought Income Elasticity Measures the responsiveness of the quantity demanded of a good to the change in income of the people demanding the good Inferior goods: as income increases quantity demanded decreases Normal good: as income increases quantity demanded increases 1. Reebok's operating costs were higher Op costs were 32.7% of sales Industry average was 27% Causes Endorsement contracts Sponsoring too many sporting competitions Net effects of a bad time: Reduced revenue Increased expenses Reduced asset value Key retailer for athletic shoes at this time was Foot Locker Reebok has two types of consumers Us - making ads for us Footlocker - the retailer Relationship Marketing - account managers who are geared towards making long term relationships - these account managers are working with companies like foot locker (large companies) Idea is to ultimately make the two institutions trust each other 1. Did not manage their relationship with Foot Locker very well They hired inexperienced people doing the relationship marketing All foot locker wanted was exclusivity of one shoe and Reebok wouldn't do it. Instead, they sold it to anyplace including discounters. Footlocker could not compete against the discounters so they sold less Reebok shoes.
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