Cross Elasticity of Demand: How It Shapes Australian Markets in 2025

In the fast-evolving Australian economy of 2025, understanding the forces that shape consumer behaviour is more crucial than ever. One concept that often flies under the radar—but can make a massive difference to both businesses and consumers—is cross elasticity of demand. Whether you’re setting prices for your business, considering a new product launch, or simply trying to make sense of shifting supermarket prices, knowing how products interact in the market can be a game-changer.

What Is Cross Elasticity of Demand?

Cross elasticity of demand measures how the quantity demanded of one good responds to a price change in another. In simple terms, it’s about how products compete or complement each other in consumers’ wallets. For example, if the price of almond milk spikes, will Aussies buy more oat milk instead? Or, if petrol prices drop, what happens to the demand for public transport?

• Substitutes: If two products can replace each other (like beef and chicken), a price increase in one often drives up demand for the other. Their cross elasticity is positive.

• Complements: If two products are used together (like coffee and sugar), a price hike in one typically reduces demand for both. Their cross elasticity is negative.

This measurement is crucial for pricing strategies, product development, and forecasting consumer trends.

Why It Matters in 2025: Real-World Examples

Australia’s cost-of-living pressures and evolving consumer habits have made cross elasticity even more relevant this year. Here’s how:

• Grocery Wars: In early 2025, major supermarkets like Coles and Woolworths adjusted pricing on staple items as global supply chain issues eased. When Coles cut the price of its home-brand pasta, sales of private-label sauces also surged—demonstrating strong complementarity. Meanwhile, a 2025 ACCC review noted a noticeable shift in bread demand when gluten-free alternatives were discounted, highlighting substitution effects.

• Energy and Transport: As Australia rolls out expanded EV incentives in the 2025 Federal Budget, analysts have observed that lower electric vehicle prices are dampening demand for traditional petrol cars. At the same time, ride-sharing apps have seen a slight uptick as fuel prices fluctuated, reflecting a complex web of cross elasticities between transport modes.

• Streaming Services: The streaming wars intensified in 2025, with Disney+ and Netflix both experimenting with price hikes. As Netflix bumped up its basic plan cost, market data showed a corresponding increase in sign-ups for Disney+ and Stan—classic substitute behaviour at work.

Strategic Moves for Businesses and Consumers

Understanding cross elasticity isn’t just academic. It can drive real, strategic decisions:

• Smart Pricing: Businesses can anticipate how a competitor’s price move will affect their own sales. For instance, a bakery might respond to a rival’s bread discount with a targeted pastry promotion, rather than a price war.

• Bundling and Promotions: Recognising complementary products allows retailers to bundle goods effectively. In 2025, many supermarkets offered “meal deal” bundles after observing that price drops on meat led to higher sales of vegetables and sauces.

• Consumer Savvy: For households, knowing how cross elasticity works can help identify the best deals. If you notice your preferred product is getting pricier, check if a close substitute has become more affordable.

Policy Implications and 2025 Updates

Cross elasticity is on the radar of policymakers, too. This year, the Australian Competition and Consumer Commission (ACCC) and Treasury have been analysing cross-market impacts as part of ongoing competition reforms. The 2025 review of supermarket pricing, for example, specifically examined how private-label and branded products interact, influencing recommendations for fairer shelf space allocation and clearer price signalling.

Additionally, as the government encourages EV adoption, understanding cross elasticities with public transport and traditional vehicles is helping shape infrastructure investments and subsidy programs.

Conclusion: Your Edge in a Competitive Market

Cross elasticity of demand isn’t just a textbook term—it’s a powerful lens for decoding market moves and making smarter decisions. Whether you’re a business leader, policymaker, or a sharp-eyed shopper, recognising these relationships gives you a genuine edge in Australia’s dynamic 2025 economy.