Desensitization to commodity price fluctuations by product characteristics

Abstract

Little is known about how commodity price fluctuations transmit to the prices of products. In this paper we present a price dynamics model for a product which is in competition with a commodity. The price of the commodity is treated as a stochastic process. Commodity price fluctuations are transmitted to the product price through a demand function which is obtained by aggregating the choices of a consumer population. Importantly, these consumers make their choices on the basis of a utility function which includes a term relating to product characteristics. Numerical simulations show that improved product characteristics tend to suppress the transmission of commodity price fluctuations. We apply our model to a realistic case of monolayer platinum (a product) in competition with platinum metal (a commodity) for adoption by consumers as a catalyst material. While monolayer platinum shows only a minor improvement in catalytic turnover rates for oxygen reduction, the resulting product characteristic improvement is sufficient to effectively eliminate product price fluctuations, at least for the consumer population regime considered here.