Estimate the price elasticity of wood windows relative to aluminum windows.
Substitution models based on distributed lags of relative prices appear to provide more accurate and detailed information on market share changes than models that rely on arbitrary technological innovation formulations. While the short-run own-price and cross-price market share elasticities may be low, the long-run elasticities suggest that direct substitution between competitive products, such as wood and aluminum windows, can exceed 1.0.
The case study shows a 1.7 percent change in wood window market share in the long-run for every one percent change in relative price. This high long-run price elasticity of substitution may have significant implications for carbon mitigation analysis and other environmental policy issues.