The Cola Wars: A Story of Cross Price Elasticity of Demand

In the bustling city of Mumbai, FizzUp and ColaCraze were the biggest competitors in the soft drink industry. Both brands had loyal customers, flashy advertisements, and retail shelves stocked in every grocery store.

For years, the two brands had been neck and neck, competing for market share. But then, something happened that changed everything.

The Price Hike That Shook the Market

One summer, FizzUp’s management made a bold decision. Due to rising costs, they increased the price of a 500ml bottle from ₹40 to ₹50.

FizzUp’s CEO, Rohan Verma, was confident. “Our customers love our brand. A small price increase won’t affect us.”

But he underestimated one thing—cross price elasticity of demand.

The Unexpected Shift

As soon as FizzUp raised its prices, ColaCraze saw an unexpected surge in sales. Their stores were running out of stock, and distributors were making urgent requests for more supplies.

Why? Because FizzUp and ColaCraze were substitute goods—when the price of one increased, demand for the other rose.

FizzUp’s loyal customers weren’t so loyal anymore. Seeing the ₹10 price difference, many of them switched to ColaCraze without a second thought.

📉 FizzUp’s sales dropped by 30%
📈 ColaCraze’s sales increased by 40%
💰 ColaCraze even increased its market share without changing its price!

Understanding Cross Price Elasticity of Demand

Rohan’s team finally realized:

💡 When two goods are substitutes, an increase in the price of one boosts the demand for the other.

💡 When two goods are complements, an increase in the price of one reduces demand for the other.

For example:
✅ Tea and Coffee → If tea becomes expensive, coffee demand rises.
✅ Cars and Petrol → If petrol prices go up, car demand falls.

FizzUp’s Comeback Strategy

To recover, FizzUp launched discounted combo packs, pairing its soft drinks with popular snacks. They also introduced a limited-time cashback offer, ensuring that customers had an incentive to stick with their brand.

But the damage had been done. ColaCraze had already gained a loyal new customer base, all thanks to cross price elasticity of demand.

The Lesson?

📌 If your product has strong substitutes, a price increase can drive customers straight to your competition.

📌 If your product is a complement, you need to be mindful of other prices that impact your demand.

So next time you adjust prices, ask yourself:
Are you making life easier for your competitors? 🤔💡

[Economics]