Cross elasticity of demand is an economic measure that quantifies the responsiveness of the quantity demanded of one good to a change in the price of another related good — calculated as the percentage change in quantity demanded of good A divided by the percentage change in the price of good B. A positive cross elasticity indicates that the two goods are substitutes (when the price of one rises, demand for the other increases — for example, tea and coffee), while a negative cross elasticity indicates complementary goods (when the price of one rises, demand for the other falls — for example, cars and petrol). A cross elasticity near zero indicates that the two goods are unrelated. For equity analysts and investors on Ventura Securities, cross elasticity of demand is a valuable tool for assessing competitive dynamics between companies in the same sector — high positive cross elasticity between two companies' products signals intense substitutability and pricing competition, which constrains margins, while negative cross elasticity between a company's hardware and software products indicates a lock-in effect that supports pricing power and recurring revenue.
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