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...Various companies are beginning to provide software tools that aid in demand management. These tools take into account both available inventory and also the cross-elasticities of different products in suggesting pricing strategies for multiple products. How does this work? The portion dealing with available inventory is similar to the yield management algorithms mentioned above, while the portion dealing with cross-elasticities takes into account the differing price-elasticities of demand for various products. There may be some products where the consumer demand is highly price-elastic, meaning demand is highly responsive to a given change in price; and there may be products which are less price-elastic. For example, we would say toothpaste has low price elasticity; if the price of toothpaste increased somewhat, we would still expect consumers to purchase the product at the same rate as before. For the products below, which do you think are more price-elastic and which less so?

If products have different price-elasticities, algorithms can make use of this to suggest particular pricing strategies to maximize a firm's objective. Perhaps the firm wants to maximize profit, revenue, or market share. Different objectives would produce different strategies, but the general idea is that using sophisticated strategies can add significantly to a firm's performance...