§8.3 Characteristics of demand and links to prices

(164) Another factor crucial for estimating passing-on effects is the nature of demand that the direct purchasers face on the market where they are active. In economics, the relationship between demand and the price level is an important factor when describing how markets function. In any market, demand is referred to as the quantity of the good or service in question that purchasers on this market would buy at a given price level. (165) Most typically, the higher the price level the lower the aggregate quantity of the products that the purchasers on the market are willing to buy. The price sensitivity of demand determines the strength of the relationship between price and demand. If, for example, an increase in price of EUR 1 is associated with a significant reduction in the quantity purchased demand is said to be more price-sensitive than if the purchase quantity reduction is less important for the same EUR 1 price increase. (166) The standard downward sloping inverse demand curve is illustrated in Box 14 below (116). In this Box, area A corresponds to the overcharge from the infringement. The price increase that harms the direct purchaser is taken into account as an increase of this purchasers' input costs. It is determined by c 2-c 1. The passing-on related price effect is illustrated by area B, while its volume effect is illustrated by area C. As illustrated, a relatively high price level (p 2) correspond to a relatively low quantity supplied (q 2). Box 14 The standard demand curve — price and volume effects (167) A commonly used summary of this price sensitivity is the so-called price elasticity of demand. It shows the percent change in demand quantity associated with a one percent price increase. For example, a firm's own price demand elasticity of – 0,5 means that a one percent price increase is associated with a 0,5 percent reduction in demand. An elasticity of – 0,2, on the other hand, implies only a 0,2 percent reduction in demand for a one percent price increase. In the latter case, demand is said to be less elastic than in the former case, that is, less price sensitive as the purchase quantity reacts less strongly to the price increase. (168) When assessing the passing-on of an overcharge from a direct purchaser to an indirect purchaser, the demand that the direct purchaser faces is the one of interest. The indirect purchaser might reduce its demand as a response to a price increase by the direct purchaser. (169) The extent of the volume effect is directly affected by the price sensitivity of the demand. This is because the price sensitivity determines the reduction of demand following a price increase. For a given price increase, the reduction of output is larger, the more price sensitive the demand is. Therefore, the volume effect, i.e. the profit lost by the infringer's customer due to the reduction of output (demand), is closely linked to the price sensitivity of demand. (170) The extent of the passing-on, and hence the size of the passing-on effects, is also related to the relationship between the demand and the price level. In this case, however, it is not the demand price sensitivity that is directly relevant, it is rather the change of the demand price sensitivity as the price level changes. This change of the price sensitivity with respect to the price level is referred to as the curvature of demand. (171) The curvature of demand is the rate at which the responsiveness of demand to price-changes varies as price or output changes. When the demand curve is linear, it has no curvature and the slope is constant. In the case of convex demand, the demand becomes less sensitive to price changes as the price increases. This may be the case if the products or services affected by the overcharge are characterised as essential goods. A hypothetical example may be the demand for drinking water in the desert, because an average customer may be decreasingly sensitive to a price increase as the quantity available is reduced. Conversely, such a customer may be increasingly sensitive to a price increase as the quantity available is increased. (172) If the demand curve is concave, as shown in the centre of Box 15, the demand becomes more sensitive to price changes as the price increases. This could for instance be the case if a substitute of the product affected by the overcharge is available to the customer. An example may be the demand for gasoline. At a certain price level, the customers may switch their consumption away from cars using gasoline to electrical cars. This would imply that the demand for gasoline will become more sensitive to price changes, as more customers switch their supply if the price on gasoline increases. (173) The curvature of the demand curve may have a significant impact on the passing-on of overcharges. For a given level of competition the passing-on of an industry-wide overcharge will increase the more convex the demand curve is. If demand is sufficiently convex, the passing-on rate may exceed 100 percent. Box 15 Other curvatures of demand Depending on the characteristics of the market, the demand curve may be linear, convex or concave as illustrated below. The downward shape of a demand curve indicates that, as price decreases, customers will demand more of a product. The slope of the demand curve illustrates how the quantity of demand changes with the price. A steeper demand curve implies that demand is less sensitive to price increases.

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Source: EUR-Lex (Cellar) · retrieved 2026-09-07