A critical part of pricing is demand estimation. By understanding the shape of the demand curve, we can segment product offerings, and set pricing and promotions.

When prices get fixed at an artificially low level, supply gets constrained, rather than demand. This is the case in China’s energy market, where the government controls retail pricing. As a result, refineries don’t bother refining, and gas pumps lie empty amidst booming demand (see article here). China is planning to liberalize their energy market somewhat. Now we go back to demand estimation. Experts suggest a small price increase will actually increase consumption, because supply will go up in a relatively flat part of the demand curve. A larger price increase will push into a steeper part of the demand curve, and overall consumption will go down.

With energy prices sky-high in the US and overall global supply currently constrained, what happens across the Pacific will have a growing impact on our energy prices.

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