What Determines the Elasticity of Industry Demand?

Emilio Pagoulatos; Robert Sorensen

doi:10.1515/jafio-2017-0041

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What Determines the Elasticity of Industry Demand?

Emilio Pagoulatos and Robert Sorensen

Published/Copyright: February 20, 2018

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From the journal Journal of Agricultural & Food Industrial Organization Volume 15 Issue 2

Abstract

This paper develops estimates of price elasticity of demand for a sample of U.S. food and tobacco manufacturing industries and tests a model explaining differences in interindustry elasticity. The empirical results are consistent with the hypothesis that demand elasticity is in part determined by the competitive behavior of firms in an industry. In particular, high advertising expenditures result in lower elasticities of demand. Other important variables influencing demand elasticity are industry concentration, the stage of production, the existence of protection from domestic and foreign entry, and the extent of new-product introduction in a particular market.

‘What makes monopoly possible is the efficiency of large-scale operation; what makes it worthwhile is the slope of the demand curve’ [Dorfman (1978, p. 153)].

Keywords: industry demand; industry demand elasticities; determinants of price elasticity

Article Notes

This article was originally published 1986 in the International Journal of Industrial Organization, Vol. 4/3, 237–250.

Acknowledgements

We are grateful to Azzeddine Azzam, Leonard Cheng, Robert Emerson and Angelos Pagoulatos for their helpful comments. Special thanks go to the two referees, especially Dennis Leech, whose careful comments and suggestions have greatly improved the paper. David Karemera provided computational assistance. Of course all remaining errors are ours.

Table A:

Obser- vation no. OBS	Industry code IND	Mean elast PEL	Std. error mean elast STEPL	1972 elast. PEL72	Std. error 1972elast. STEPL72	Concen- tration CR4	Consumer demand/ sales CD/S	No. brands BN	R&D/dom. SalesRD/DS	Advert./dom. sales A/DS	Capital requirem. KREQ	Effective tariff EFFT
1	2011	0.703	0.089761	0.671	0.028237	22	56.34	45	0.000000	0.011388	0.4194	8.9
2	2013	0.648	0.136418	0.574	0.115323	19	83.82	232	0.190539	0.013338	−0.1839	12.0
3	2016	0.521	0.070590	0.296	0.0228736	18	66.29	35	0.151066	0.018128	−1.1777	10.3
4	2021	0.418	0.211586	0.518	0.164541	45	42.55	41	0.308090	0.018794	−1.8579	46.7
5	2022	0.585	0.284957	0.495	0.161969	42	61.06	114	0.287261	0.026524	−0.7257	29.6
6	2023	0.262	0.055419	0.415	0.091352	39	47.28	49	0.371410	0.032896	0.6921	50.0
7	2024	0.349	0.136106	0.359	0.127357	29	63.53	110	0.300256	0.030226	0.1740	41.2
8	2026	0.172	0.050701	0.237	0.042426	18	68.25	263	0.280044	0.015702	−0.1508	114.6
9	2032	0.064	0.036037	0.056	0.031250	67	94.18	109	0.653486	0.068968	2.5403	36.8
10	2033	0.229	0.122155	0.193	0.071948	20	77.55	271	0.412830	0.026018	1.0431	36.8
11	2034	0.207	0.110639	0.179	0.079470	33	53.10	42	0.423994	0.053317	1.0494	36.8
12	2035	0.232	0.098580	0.197	0.079535	33	72.37	115	0.464948	0.084284	0.33647	−20.0
13	2037	0.247	0.082803	0.240	0.065786	36	80.58	195	0.502759	0.038210	1.16002	24.0
14	2041	0.082	0.037200	0.070	0.027910	33	18.92	42	0.175586	0.038319	0.19885	34.8
15	2043	0.031	0.095881	0.030	0.087,547	90	91.59	121	0.924622	0.112290	3.63366	70.0
16	2044	0.251	0.105895	0.184	0.053226	43	25.00	25	0.000000	0.048191	0.49470	90.2
17	2045	0.035	0.017308	0.037	0.018593	68	78.25	86	0.701491	0.044294	1.65937	70.0
18	2046	0.054	0.025705	0.037	0.016520	63	6.42	19	0.588595	0.011665	3.88313	15.0
19	2047	0.061	0.040000	0.059	0.042343	51	89.82	170	0.398122	0.072259	−0.15315	38.3
20	2048	0.102	0.062249	0.081	0.049763	23	1.30	52	0.402988	0.022668	−0.15315	21.8
21	2051	0.220	0.075084	0.213	0.044799	29	78.14	157	0.100095	0.026825	0.87547	1.9
22	2052	0.188	0.113526	0.173	0.083875	59	95.08	98	0.341808	0.026173	2.48591	8.5
23	2061	0.019	0.024217	0.018	0.023568	44	31.87	1	0.000000	0.0122140	1.62924	209.3
24	2062	0.131	0.027348	0.109	0.021036	61	31.87	35	0.299632	0.0107867	1.99252	209.3
25	2065	0.074	0.025962	0.070	0.026534	32	79.20	128	0.197367	0.0489471	1.52844	29.1
26	2066	0.304	0.044028	0.308	0.050117	74	53.44	61	0.267865	0.0370546	1.98582	56.2
27	2067	0.187	0.045351	0.205	0.050956	87	91.60	31	0.500788	0.0612965	1.83578	28.2
28	2074	0.009	0.177665	0.014	0.280301	43	0.01	1	0.000000	0.0162518	0.02469	465.9
29	2075	0.275	0.083042	0.174	0.042742	54	1.14	27	0.245696	0.0095822	0.00797	252.9
30	2076	0.222	0.319979	0.313	0.495561	70	0.01	1	0.000000	0.0236418	−0.49102	35.5
31	2077	0.067	0.028496	0.070	0.030140	28	0.01	1	0.000000	0.0160037	−0.57803	92.9
32	2079	0.250	0.057043	0.185	0.031603	44	49.47	88	0.303977	0.0465084	0.99375	92.9
33	2082	0.283	0.178074	0.218	0.136490	52	70.31	94	0.426020	0.0537974	3.43476	20.1
34	2083	0.222	0.101189	0.180	0.082149	48	0.01	1	0.000000	0.011361	0.58445	10.0
35	2084	0.198	0.542076	0.237	0.649166	53	71.64	306	0.164523	0.045491	1.90687	34.9
36	2085	0.033	0.078482	0.023	0.052031	47	70.59	420	0.305706	0.042799	2.29071	54.2
37	2086	0.052	0.118028	0.042	0.096365	14	89.79	150	0.200147	0.072353	0.31115	7.7
38	2087	0.008	0.025603	0.006	0.019313	66	7.50	46	0.680258	0.027315	1.36940	42.2
39	2091	0.736	0.272903	0.559	0.191866	50	95.19	20	0.000000	0.018277	0.20864	15.6
40	2092	0.695	0.279472	0.848	0.377324	20	31.04	20	0.151982	0.010487	−0.80296	15.6
41	2095	0.120	0.042852	0.109	0.027222	00	76.17	89	0.728272	0.046998	2.21703	2.5
42	2098	0.102	0.068860	0.096	0.055984	38	82.55	30	0.586522	0.045260	0.44725	7.4
43	2111	0.107	0.267316	0.123	0.280453	84	94.55	193	0.566696	0.066355	3.83834	78.6
44	2121	0.756	0.549745	0.741	0.952122	56	94.53	51	0.196335	0.025131	0.94313	88.2
45	2131	0.105	0.090492	0.166	0.152327	71	94.59	59	0.209308	0.125271	1.60704	−113.2
46	2141	0.306	0.278591	0.373	0.182918	67	0.01	1	0.000000	0.010790	−0.26397	15.2

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Published Online: 2018-2-20

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Keywords for this article

industry demand; industry demand elasticities; determinants of price elasticity