Cross Elasticity of Demand:  

When a change in the price of one product leads to a change in the demand for another, economists call this the cross-price effect. Cross price elasticity measures how responsive the demand for one good is to a change in the price of another good (a related good).

Cross price elasticity = Percentage change in quantity demanded of Good 1 / Percentage change in the price of Good 2

Because producers often make many different kinds of goods, it is useful to know how changes to one good affect the others. With cross price elasticity an important distinction can be made between substitute products and complementary goods and services. With substitute goods such as brands of chocolates or washing powder, an increase in the price of one good will lead to an increase in demand for the rival product. Cross price elasticity for two substitutes will be positive. The stronger the relationship between two products, the higher is the co-efficient of cross-price elasticity of demand. For example with two close substitutes, the cross-price elasticity will be strongly positive. If two goods are substitutes, the price of one will move in the same direction as the price of the other good. Either both will rise or both will fall. Likewise when there is a strong complementary relationship between two products, the cross-price elasticity will be highly negative. This is because in the case of complements, the price of one good and the quantity demanded of another move in opposite directions. Unrelated products have a zero cross elasticity.

If a competitor cuts the price of a rival product, firms use estimates of cross-price elasticity to predict the effect on the quantity demanded and total revenue of their own product. For example, two or more airlines competing with each other on a given route will have to consider how one airline might react to its competitors price change.