Coca-Cola's margins as a live sign of pricing power
How inelastic and elastic demand change revenue
| Type | Price Increase Effect | Examples |
|---|---|---|
| Inelastic (pricing power) | Revenue rises (customers stay) | Insulin, iPhone, Coca-Cola, tobacco |
| Elastic (no pricing power) | Revenue falls (customers leave) | Generic commodities, airlines, fast fashion |
| Unit elastic | Revenue unchanged | Rare in practice |
Why raising prices without losing customers signals a moat
Warren Buffett looks for companies that can raise prices without losing customers. That is pricing power, and it is one of the strongest indicators of a durable competitive moat.
Comparing gross margins to spot pricing power
Working out whether a price hike raised or lowered revenue
Why pricing power is the simplest test of quality
Going deeper: putting a number on elasticity
Going deeper (optional). Up next: the number that MEASURES pricing power -- how economists put an actual figure on 'elastic' versus 'inelastic.' An optional aside you can skip on first pass and come back to anytime. Continue when you're curious.
Price elasticity of demand is just %ΔQ divided by %ΔP, taken as a magnitude (ignore the minus sign -- quantity and price normally move in opposite directions). The size of that one number decides which row of the revenue table above you land on. |E| < 1 is INELASTIC (the top row -- a price hike raises revenue because customers barely leave). |E| > 1 is ELASTIC (the second row -- a price hike loses revenue because too many customers walk). |E| = 1 is UNIT ELASTIC (the third row -- revenue unchanged). The cutoff is exactly 1, and it is exactly the line between the first two rows of that table.
Streaming service: price +20%, subscribers -8%, so |E| = 8% / 20% = 0.4. Below 1, so demand is inelastic and revenue RISES: 0.92 × 1.20 = 1.104, about +10.4% (the check-in answer). Budget airline (from the quiz): fares +8%, passengers -15%, so |E| = 15% / 8% = 1.875. Above 1, so demand is elastic and revenue FALLS: 1.08 × 0.85 = 0.918, about -8.2%. Rolex: prices +8% with quantity essentially flat, so |E| is about 0 / 8% = 0 -- the deepest inelasticity, which is why its revenue rises fastest of the three. One formula, three different rows of the table above.
Sit with the ideas.
Luxury watchmaker Rolex raises prices 8% annually and sees no decline in sales. A budget airline raises fares 8% and loses 15% of passengers. Which has more inelastic demand?