Mondelēz and Marshall's Second Law of Demand

Soaring cocoa costs prompted Mondelēz, the maker of Cadbury and Milka chocolate, to raise European chocolate prices by roughly 30%. Management anticipated a decline in sales. But consumers proved more price-sensitive than expected. Historically, the company had observed demand elasticities of approximately −0.4 to −0.5. Following the increases, elasticity rose in magnitude to roughly −0.7 to −0.8. On its October 2025 earnings call, CEO Dirk Van de Put noted that some chocolate bars had crossed important price thresholds, prompting consumers to reconsider their purchases. Competitors' decisions not to fully match Mondelēz's price increases also contributed to the disappointing sales response.

Marshall's Second Law of Demand says that demand tends to become more elastic as price rises. At a higher prices, more products are viable alternatives. Consumers may barely notice a price increase when chocolate is relatively inexpensive. But as prices climb, more consumers begin substituting. They may choose cheaper brands, purchase smaller packages, or forego chocolate altogether. Managers should be cautious about extrapolating historical elasticity estimates.  The response to a 30% price increase is likely "out-of-sample" from the historical context.

Campbell's Does the Elasticity Math

Faced with rising costs, Campbell's is raising prices on about half of its products by an average of 4–5%. But how much will sales fall as a result? On its recent earnings call, CFO Todd Cunfer explained that the company is using an assumed price elasticity of demand of −1.5 to forecast the impact. A 5% price increase would therefore be expected to reduce unit sales by approximately 7.5%. Revenue would actually decline, but profits could increase because the higher margin on remaining sales more than offsets the lost contribution from reduced volume. Campbell's expects the price increases to improve its bottom line despite their negative effect on sales.

The calculation is complicated by competitors' responses. Campbell's assumes that competing brands will not immediately match its price increases, making its products relatively more expensive. If competitors also raise prices, Campbell's could lose fewer customers than its forecast predicts. Cunfer acknowledged that the company is using different elasticity estimates across its product lines and has deliberately chosen conservative assumptions. That is, Campbells appears to be making relatively sophisticated use of elasticity concepts.

How Low Should Seasonal Discounts Be?

Retailers often mark down seasonal merchandise to clear inventory, but how big should the discount be? An Impact Analytics article describes a clothing retailer that initially discounts winter coats by 20%, observes the resulting sales, and then increases the discount to 35% when inventory remains too high. This is a simple pricing decision in which lowering price sacrifices margin on units that would have sold anyway but generates additional sales. Keep cutting price as long as the marginal benefit from the additional sales exceeds the marginal cost from the lower price.

The pricing calculation can must compare benefits to costs. Selling another coat frees shelf and warehouse space, releases capital tied up in inventory, and avoids being stuck with merchandise that will be worth even less when the season ends. On the other hand, deeper markdowns may damage the brand or teach customers to wait for discounts. Include all the consequences of changing price, including possibly hidden changes in costs. The profit-maximizing markdown isn't the one that clears the shelves; it is the one where the benefit of cutting the price a little further no longer exceeds the cost.

Using Demand Signals to Re-Price

A CNBC story indicates that Starbucks repeatedly raised menu prices over the past several years. Initially, this strategy worked well. Higher prices more than offset modest declines in customer traffic, increasing average revenue per transaction. More recently, however, the company's quarterly earnings have shown declining customer visits, and new CEO Brian Niccol has shifted the company's emphasis away from broad price increases and toward improving service, simplifying the menu, and restoring the in-store experience, i.e. product differentiation. While many factors undoubtedly contributed to Starbucks' slowdown, the company's strategic pivot suggests that management believes customers have become increasingly willing to substitute away from Starbucks when prices rise. The available evidence is consistent with demand becoming more price elastic than it was only a few years ago.

Demand elasticity is not a fixed characteristic of a product or brand. Firms may consider premium brands' demand characteristics as permanent, but elasticity depends on the availability of substitutes and customers' willingness to switch. As time passes after a price increase, more consumers become aware that the price has changed, become more willing to experiment with competing brands, and discover acceptable alternatives. With better informed customers, future price increases can trigger much larger reductions in sales than before. The Starbucks experience is less a story about charging "too much" for coffee than about how repeated price increases may inadvertently encourage customers to search for substitutes, making demand progressively more elastic. Every price increase is also an experiment that provides information for future pricing decisions.

Demand for Metro Rides to FIFA Matches is Inelastic

A recent Forbes article helps explain why getting to FIFA World Cup matches by will cost spectators $150 just for the metro train ride to get to the stadium. One contributing factor is that demand becomes more inelastic when it is a complement. Fans who have already committed to travel, lodging, and match tickets may have already budgeted $5,000 for the event. What’s another $150? The World Cup in NYC is a once-in-a-lifetime event for many attendees, and transportation costs are a small share of total trip expenditures. Combine that with few viable substitutes ways to reach the stadium and you have a market where consumers are effectively “captive.” Under these conditions, even large price increases result in only modest reductions in quantity demanded, allowing providers to charge prices far above normal levels.

From a pricing perspective, mega-events shift firms toward the region where optimal markups are high because elasticity is low. The inverse elasticity rule implies that when consumers are less price responsive, firms (or cost-recovering public agencies like NJ Transit) can pass through more of their costs without losing much demand. The $150 fare is therefore less an aberration than a predictable outcome of event-driven economics. The broader lesson is that mega-events elevate willingness to pay for complements, making demand more inelastic.

Substitutability Determines Elasticity

The WSJ recently reported on how the Iran war is disrupting energy markets, particularly in Asia and specifically for Liquefied Natural Gas (LNG).

Qatar suspended production even before Iran struck its giant Ras Laffan export facility, causing damage that will take years to repair and delaying its expansion plans. The lost supply is ripping through the global economy.

One ripple has been a doubling in prices in Japan and Korea.

These high prices have led many Asian customers to substitute toward alternatives, including clean renewables but also dirty coal. What was not a viable substitute at $11/BTU has become viable at $22/BTU. Inelastic LNG demand has become more elastic as a result, suggesting that prices may have plateaued at $22/BTU.

Elizabeth Warren's plan to keep poor people in apartments, and out of homes

The Free Press:

...“Warren is deliberately trying to choke off investment in the construction of new single-family rental properties. This is profoundly regressive. Why is it OK for large investors to build and rent out apartments but not single-family homes?” He adds: “Warren’s policy effectively helps rich people keep working-class renters out of their towns.” ...

BOTTOM LINE: More investment increases supply which reduces price.

If we tax the rich, ...

...they will leave, work less, and there are not enough of them to raise much money. 

The Economist: 

The “Robin Hood” state, which takes from the rich to give to the poor, has obvious appeal. Governments across the developed world are strapped for cash. Budgets are burdened by legacy debts, ageing populations and the need to spend more on defence. 

INSTEAD ...

The limited revenue-raising power of the rich is why European governments have to fund their big spending with broad-based levies, such as taxes on consumption. By contrast, America, with its low overall tax burden, can get by with one of the world’s most progressive tax systems.

Broad-based taxes do not only raise much more money. They are also politically healthier. A society where the many pay tax and benefit from spending is stronger than one where the few have to pay for the many.

BOTTOM LINE: lower rates on a broader base typically produce more tax revenue ... than high rates on a narrow base. ...

HOWEVER, if progress on artificial intelligence concentrates incomes at the top, as almost everyone in Silicon Valley expects, then the tax system will require fresh thinking:  ... we may have to figure out how to redistribute wealth without destroying too much of it.  

Irony: quitters are making tobacco companies rich

   ANALYSIS from the Economist:

When lots of people smoked, there were many “price-elastic” consumers. In plain English, they were sensitive to increases in the cost of a cigarette. As more people have quit, however, only the most committed smokers are still puffing. Companies have responded by raising prices at an ever-quicker pace.

MY COMMENT:  In chapter Chapter 6, the simple linear demand curves get more price elastic as price increases. But for cigarettes, higher prices make the more-price-elastic consumers stop smoking. The remaining smokers have less elastic demand, so demand becomes less elastic as price increases. This allows tobacco firms to raise price more--and earn higher profit--than they other otherwise would.

You can also understand this using the language of Chapter 14 (indirect price discrimination), with two groups of consumers with different elasticities of demand. At lower prices, both groups consume, but at higher prices, only the less-price-elastic group consumes. Firms optimally raise price and earn higher profit by serving only the less price-elastic group.

An obvious question raised by this interpretation is why didn't firms simply raise price so that the less elastic consumers quit and then reap higher profit from the higher prices. One possible answer is that the tobacco companies didn't know. It was only when so many snokers quit that they realized the remaining ones had much less elastic demands.

What happens when you cut the supply of Northwestern football by 75%?

WSJ: Price goes up by 900%!

Ryan Field, where Northwestern played until this season, sat over 47,000 fans—nearly four times as many as the [temporary] cv lakeside stadium.

Tickets for last Saturday’s home game against Indiana started at $129 on the school’s official site, an increase of more than 900% on the $17 average secondary-market price for last season’s home opener.

The shift in capacity creates a natural experiment, a movement along the demand curve, that allows us to calculate the Price Elasticity of Demand for Northwestern football. 

(Price Elasticity of Demand) = (% change in quantity)/(% change in price) = (-75)/900 = -1/12, 

a very inelastic demand, i.e., one whose quantity does not respond much to price changes.  

But this natural experiment may make demand look less elastic than it really is because of the quality increase: its intimate feel and views of Lake Michigan, make the new stadium more attractive.  This increase (shift) in demand due to higher quality increases the price change, making demand appear less elastic than if the new stadium were the same quality as the old one.  

HT: Lamar

Pricing the Atlantic

A WSJ article by Alexandra Bruell reports that three years ago the Atlantic magazine ran a $20 million deficit which led to layoffs. A new boss, Nick Thompson, was tasked with turning this around. Along with editorial changes toward longer investigative pieces rather than breaking news, the Atlantic raised subscription prices 50%. How did he know to do this?

Thompson’s team ran experiments to determine the best way to charge more without alienating new readers. It is offering fewer stories free and no longer discounting subscriptions. Last year, it raised prices for annual subscriptions to $80 from $60 for digital and to $90 from $70 for both print and digital.

Revenue was up 10% last year to close to $100 million and the magazine is now profitable.

The Economics of Skiing

Vail's two-part pricing (Fixed Fee + Low Daily Price) from The Economist:  

With the Epic Pass, Vail has changed the offer. Skiers can now get unlimited skiing at a whole pack of resorts cheaply, but only by committing before the season starts. The result, says Stuart Winchester, who runs the Storm Skiing Journal, an industry blog and podcast, is that for the first time in decades skiing in America is reliably profitable. But it has come at a cost to competition. “Everyone else is swimming around. Vail is buying everything,” he says.

Vail now owns 41 resorts, including more than two dozen tiny hills on the East Coast and in the Midwest, which they consider “feeder” resorts that nurture new skiers who eventually may come west. In 2018 a competing pass, the Ikon, was launched by the Alterra Mountain Company, owned by the billionaire Crown family of Chicago, which shares revenue with independent resorts. Nowadays, most of America’s biggest ski areas are on one or the other pass.

Chapter 6, Promotional Pricing Question

QUESTION:  In a supermarket, an end-of-aisle promotional display typically makes the demand more elastic (see link) by making customers more aware of price differences between products.  

Specifically, suppose that a promotional display changes the price elasticity of demand for a good from -2 to -3. If the normal price is $10, what should the promotional price be? 

ANSWER: 

• STEP 1: Use the optimal pricing formula from Chapter 6 to solve for Marginal Cost (MC) at the pre-promotional elasticity of -2.  
• (PRICE-MC)/PRICE=1/|Elasticity| 
• Margin=Target Margin 
• ($10-MC)/$10=1/2 
• $10-MC=$5 
• MC=$5 
• STEP 2: Use the optimal pricing formula to solve for the new price at elasticity of -3
• (Price-$5)/Price=1/3 
• 3*(Price-$5)=Price
• 2*Price=$15
• Price=$7.50
• CHECK ANSWER:  
• ($7.50-$5)/$7.50=1/3
• $2.50/$7.50=1/3
• 3*$2.50=$7.50
• $7.50=$7.50

On estimating elasticity from a change in price

Elasticity of demand is defined at a given Price and Quantity by taking an infinitesimal change. But in real life you cannot measure the effects of a small change, so we are presented with discrete changes. If the elasticity is not constant (most demand curves get more elastic as you raise price as consumers find more substitutes) then the elasticity after the price change may be different from the elasticity before the change. Using the percentage change from the midpoint, is a way of dealing with this: Instead of elas=((Q1-Q0)/Q0)/((P1-P0)/P0) we use elas=((Q1-Q0)/midpointQ)/((P1-P0)/midpointP); where midpointP=(P1+P2)/2, and midpointQ=(Q1+Q2)/2, and you get the formula in our favorite textbook.

ESG investing is a "normal good," i.e., demand falls when income falls

 WSJ:

When an economic shock causes our incomes to shrink, we become more risk-averse. And, in the authors’ words, we start to view the emotional or nonfinancial appeal of ESG investing as “costly” and “unsustainable” if it means forfeiting returns.

What happened when Oregon decriminalized drugs?

More evidence that Demand Curves slope downward: when you reduce the "price" of taking drugs (the expected penalty), quantity will increase. From AP:

“If there is no formal or informal pressure on addicted people to seek treatment and recovery and thereby stop using drugs, we should expect continuing high rates of drug use, addiction and attendant harm,” said Keith Humphreys, an addiction researcher and professor at Stanford University and former senior adviser in the White House Office of National Drug Control Policy.

Of 16,000 people who accessed services in the first year of decriminalization, only 0.85% entered treatment, the health authority said.

HT:  MarginalRevolution.com 

Selected price elasticities

From Wikipedia:

·        Cigarettes (US)[41] o   −0.3 to −0.6 (General) o   −0.6 to −0.7 (Youth) ·        Alcoholic beverages (US)[42] o   −0.3 or −0.7 to −0.9 as of 1972 (Beer) o   −1.0 (Wine) o   −1.5 (Spirits) ·        Airline travel (US)[43] o   −0.3 (First Class) o   −0.9 (Discount) o   −1.5 (for Pleasure Travelers) ·        Livestock o   −0.5 to −0.6 (Broiler Chickens)[44] ·        Oil (World) o   −0.4 ·        Car fuel[45] o   −0.25 (Short run) o   −0.64 (Long run) ·        Medicine (US) o   −0.31 (Medical insurance)[46] o   −.03 to −.06 (Pediatric Visits) [47]

·        Rice[48] o   −0.47 (Austria) o   −0.80 (Bangladesh) o   −0.80 (China) o   −0.25 (Japan) o   −0.55 (US) ·        Cinema visits (US) o   −0.87 (General)[46] ·        Live Performing Arts (Theater, etc.) o   −0.4 to −0.9 [49] ·        Transport o   −0.20 (Bus travel US)[46] o   −2.80 (Ford compact automobile)[50] ·        Soft drinks o   −0.8 to −1.0 (general)[51] o   −3.8 (Coca-Cola)[52] o   −4.4 (Mountain Dew)[52] ·        Steel o   −0.2 to −0.3[53] ·        Eggs o   −0.1 (US: Household only),[54] −0.35 (Canada),[55] −0.55 (South Africa)[56]

CEO's are talking price elasticity!

They probably read Chapter 6 and the NY Times Reports on what it calls their "obsession" with the idea that consumers purchase fewer items as their price increases.

Keurig Dr Pepper

“The good news is our brand strength has held up well in the face of new pricing with modest elasticity impacts across our portfolio during the quarter.”
— Robert J. Gamgort, chief executive

Callaway Golf

“To offset inflationary pressure, we have raised prices nicely this year and, as the avid golf consumer is both affluent and passionate, there has been no discernible pushback.”

Walmart

“The rising cost for essential items and customers’ reprioritization of spending led to significant mix shifts in our business.”
— John David Rainey, chief financial officer

Southwest Airlines

“Leisure travelers have a price elasticity effect where you can’t go much higher.”
— Andrew M. Watterson, chief commercial officer

Procter & Gamble

“As they are more exposed to inflation broadly in the marketplace, with the highest inflation in 40 years, it’d be naïve to assume the consumer is not looking at their cash outlay and their spending even in our categories.”

— Andre Schulten, chief financial officer

HanesBrands

“I think you’re seeing a macro environment change in the second quarter, and particularly towards the middle to end of the quarter, with the inflation really hitting the consumer, and you saw an inflection point in the consumer behavior.”
— Stephen B. Bratspies, chief executive

Crocs

“We anticipate, as the drag of high interest rates, high inflation and uncertainty continues to impact the consumer, that they will soften as the year goes on.”
— Andrew Rees, chief executive

Sweetgreen

“In Sweetgreen’s 15-year history of sales patterns, we’ve never seen this before. Our historical seasonality always showed growth during this period.”

— Mitch Reback, chief financial officer 

Hershey:

“In the first half of the year, we saw minimal price elasticity across our portfolio,” Michele Buck, the chief executive of Hershey, told investors. “We continue to expect more elasticity in the second half of the year than what we have experienced year to date.”

HT:  David

Economic Analysis of the Bezos vs. Biden spat

 WSJ reports on a spat between world's richest man and world's most powerful one:

Amazon.com Inc. founder Jeff Bezos criticized President Biden for pressing gas-station companies to immediately lower their prices at the pump, accusing the president of “misdirection” or “a deep misunderstanding” of market forces that have driven up costs.

The White House replied:

“Oil prices have dropped by about $15 [a barrel] over the past month, but prices at the pump have barely come down. That’s not ‘basic market dynamics.’ It’s a market that is failing the American consumer,” White House press secretary Karine Jean-Pierre wrote on Twitter. 

Lets bring some economic analysis into this war of words by asking the question, "Should President Biden set retail gasoline prices or should individual gas station owners set them?"  To answer it, lets look at who has enough information to make a good decision, and the incentive to do so.  

President Biden noticed that when the price of oil came down, gasoline prices did not fall by a similar amount.  Although oil is an important cost factor for retail gasoline, there are many others: (i) the cost of the real estate (real estate prices have been climbing by 20%/year), (ii) wages (businesses face labor shortages, caused partially by generous government benefits, and businesses have had to raise wages to attract workers), and (iii) the cost of holding inventory, to name a few.  

These costs vary from station to station, and it is unlikely that President Biden, or the economists who work for him, would know the right price for each station.  A price too low and we have excess demand (lines and shortages).  A price too high deters drivers from buying gas and driving (a voluntary wealth-creating transaction).  

OK, so gas station owners have better information.  But what about incentives?  President Biden is criticizing high prices because he wants to appeal to voters.  In contrast, gas station owners want to make money.  Though they have an incentive to price high, gas stations also face competition from rivals.  If they don't give consumers a better deal, consumers can go to a rival, or choose not to buy.   

Blogging Disclosure:  I have worked for the government as a regulator, and for the companies that they regulate. 

Anheuser-Busch categorization of beer drinkers

• 38% of beer consumers—the largest segment—are Loyalists. These are the core beer drinkers; they do a lot of their imbibing on premise and tend to socialize around beer and sports 
• 25% are Experimenters. These are people who have a passion for beer and are less price sensitive. They’re looking for unique taste profiles and variety and gravitate toward craft brews 
• 15% are Aspirers. Ethnic groups are more dominant in this segment and they tend to drink imported beers 
• 12% are Trend Seekers. These consumers are all about creating memorable events around social occasions. Food/beer pairings are a popular way for this group to connect 
• 10% are Sippers. There’s a skew toward females in this group, and beer is usually not their first beverage of choice. Sippers are spurring the growth of sweeter, fruity beers.

Link:  2017 study of the US beer market