How the price increase apparently led to a reduction

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Reference no: EM13233667

Recently, Pacific Cellular ran a pricing trial in order to estimate the elasticity of demand for its services. The manager selected three states that were representative of its entire service area and increased prices by 5% to customers in those areas. One week later, the number of customers enrolled in Pacific's cellular plan declined 4% in those states, while enrolments in states where prices were not increased remained flat. The manager used this information to estimate the own-price elasticity of demand and, based on her findings, immediately increased prices in all market areas by 5% in an attempt to boost the company's 2007 annual revenues. One year later, the manager was perplexed because Pacific Cellular's 2007 annual revenues
were 10% lower than those in 2006 - the price increase apparently led to a reduction in the company's revenues. Did the manager make an error?

Reference no: EM13233667

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