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Recently, Verizon Wireless 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 4 percent to customers in those areas. One week later, the number of customers enrolled in Verizons cellular plans declined 3.25 percent in those states, while enrollments 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 4 percent in an attempt to boost the companys 2016 annual revenues. One year later, the manager was perplexed because Verizon’s 2016 annual revenues were 6 percent lower than those in 2015the price increase apparently led to a reduction in the companys revenues.
What was the manager’s estimate of the own-price elasticity of demand and was that elastic or inelastic demand? Did the manager make an error? Explain.
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