Teaching and Educational Methods

Enhancing the Teaching of Product Substitutes/Complements: A Pedagogical Note on Diversion Ratios

Oral Capps, Jr.(a) and Senarath Dharmasena(a)
(a)Texas A&M University

JEL Codes: D10, D11, D12, D19
Keywords: Diversion ratios, demand systems, cross-price elasticities, identification of next-best substitutes

Publish Date: November 30, 2022
Volume 1, Issue 1

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Abstract

Application of diversion ratios in demand analysis has received little attention. Even microeconomic textbooks typically do not address this topic. The literature review presented here shows use of diversion ratios, along with cross-price elasticities, to study the price effects associated with mergers and acquisitions, a practice recommended to measure product substitutability/complementarity. With the aim of expanding experiential learning in the fields of applied economics, agricultural economics, and agribusiness, this article demonstrates how diversion ratios can be calculated from any uncompensated own-price and cross-price elasticity matrix derived from the analysis of demand systems, and it discusses the teaching of this concept in the classroom.

About the Authors: Oral Capps, Jr., is Regents Professor, Executive Professor and Co-Director, Agribusiness, Food and Consumer Economics Research Center (AFCERC), Department of Agricultural Economics, Texas A&M University (Corresponding Author: ocapps@tamu.edu). Senarath Dharmasena ia an Assistant Professor, Agribusiness, Food and Consumer Economics Research Center (AFCERC), Department of Agricultural Economics, Texas A&M University.

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