International Journal of Industria! Organization 4 (1986) 237-250.

North-Holland
WHAT DETERMINES THE ELASi-ICITY OF INGJSTRY DEMAND?
Eailio PAGOULATOS*
University ?f Nebraska, Lincoln, NE 6V83-0922, USA
Robert SORENSEN*
University of Missouri-St. Louis, St. Louis, MO 63121, USA
Final version received February 1986
This paper develops estimates of price elasticity of demand for a sample of U.S. load 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 impcrtant variables
influencing demand elasticity are industry concentration, the stage of production, the existence nf
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)].
1. Introduction
A number of economists consider the price elasticity of market demand as
one of the important elements of market structure. Demand elasticity is
.important because it can influence the incentives for price cutting by firms
[Cowling (1976), Needham (1978), Pagoulatos and Sorensen (1981)], affect
the probability of collusion [Johnson ac2 Helmberger (1967), McKean and
Peterson (1973)], and partially determine the height of scale economy
barriers [Modigliani (1958)-j. Despite its perceived importance, relatively little
research to date has been devoted to measuring the elasticity of industry
demand and investigating its determinants. It is of interest, therefore, to
inquire why different industry demand curves have different elasticities or
more specifically, whether consumer tastes and behavior a.re exogenously
*We are grateful to Azzeddine Azzam. Leonard Cheng, Roberi Emerson and Angelos
Pagoulatos for their helpful comments. Special thanks go to the two referees, especially Dennis
Leech, whose careful comments and suggesiions have greatly improved the paper. David
Karemera provided computational assistance. Of course all remaining errors are ours
O167-7187/86/$3.50 ((.j 1986, Usevier Sc:ence Publishers I+.\. (North-Holland)
23x E. Pagoulatos and R. Sorensen, Elasticity of industry demand
determined or can be influenced by the collective actiorrs L.>F firms in an
industry [Cowling (11982, pp. 1345j].
This paper aims at tilling this research gap. In particarl~rr, it presents
estimates of industry elasticities of demand for a sample of U.S. food and
tobacco industries and tests a number of hypotheses concerning the causes
for interindustry differences m demand elasticity. The results of this analysis
suggest that demand elasticities do differ widely across industries and that
rather than being exogenously given, demand elasticities are significantly
influenced by the strategic behavior undertaken by firms within industries.
The organization of the paper is as follows. Section 2 presents the
estimates of the price elasticities of demand for the sample industries.
Section 3 presents the theoretical
variables to be used in the statistical
the econometric estimation of the
conclusions.
2. Industry demand elasticities
determinants of elasticities and the
model. Section 4 provides the results of
model, and section 5 summarizes our
The values for industry price elasticities of demand utilized in this paper
were obtained from regression estimates of demand equations for each of the
46 food processing industries in our sample. Already published estlma
of
food demand elasticities could not be used because they are available ir; the
product, rather than the industry level [Brandow (1961), George and King
(1971)]. For each industry category, therefore, a consumer demand equation
was estimated using annual data for the 1952-1975 period. The only
exceptions were the chewing gum (1957-1975) and soft drink (19&I--1975)
industries, where smaller samples were available. Demand was approximated
by the following regression equation for each industry: Qf =a0 +a,Pf +a, x
i- 1*;, where Qi is an index of real per capita consumption of goods in
industry i at year t, Pf is an index of prices for goods in industry i deflated
by the retail food price index, and F is an index of disposable personal
income per capita deflated by the implicit GNP deflator. All other influences
on quantity demanded are included in the residual term ui.
The form of our demand equation is static because the consumer is
assumed to adjust within a year to a new equilibrium wnen income or prices
change. This assumption may be restrictive, since it ignores adjustments that
occur due to habit formation and purchases of durable goods. IIf longer than
annual lagged responses are significant in any industrv, then the analysis of
We did experimem with alternative d:xflators in the demand equations, such as the consumer
price index, hut the results did not differ significantly from our original estimates. This is
prcbah!y d11c tn the very small cross-ela iicity of demand between food and other goods which
has been found by Rrandow 2nd Ceuik,
States.
11,; K.ii~g to LK OII ~lre c,uder of 0.05 for the United
elasticity determinants shodd incorporate e.cplicitly the dynamic behavior
(ind persistence in ccksrlmption patterns. Comanor and Wilson ( 9474,
pp. 6768), however. caution about the diffkdty in estimating these dynamic
efCects by utilizing industry sales of manufacturers. Since these sales are often
made to wholesale and retail distribuiors rather than directly to consumers:
adjustments in the inventories held by distribb;ors make the estimation of
consumers dynamic behavior quite uncertain.
While utilizing a straightforward and uncomplicated demand model, our
goal was to obtain price elasticities of demand thalt can be readily compared
across all U.S. food and tobacco manufacturing industries. poor thas purpose,
the model format, the estimating technique, and the data sources - to the
extent possible - were kept constant. For a number of industries the price
and output indices were available from U.S. Department of Jabor (1976).
Data for the remaining industries were obtained from the U.S. Department
of Agricultures publications: Fosd, Constlmptie~~, *%&?s arad E.ulP~irniI?s.
and A~icultural Statistics.
Two estimates of price elasticity of demand were calculated. The first is-
EL=al(P]Qi), where Pi and Qi are the sample mea.n values of the two
variables and a, is the coefficient from the estimated demand equations.
Since most of the regressor variables used later in the cross-sectional analysis
are for 1972, a second elasticity measure was calculated as bL72=
a,(P7~~/Q72), where P72 and Q72 are the 1972 values of (he price and
quantity variables. Table 1 provides the values for our estimated elasticities
for each industry. Also included in table ! are the asymptotic standard errors
of the elasticity estimates which were calculated following the derivation by
Miller, Capps and Wells (1984).
zConsider a demand function as (1) below which is Lear and eqtimatrd by ordin:iry !ea~t
squares,
E,=bo+b,x,,,+..,+b*x,.,,
(1)
where xi,, is the level of regressor i for observation t (i= 1,. . . , k), ho,. . , b, are estimated
parameters, and j, is the predicted quantity for observation t given x!,!. . , xl,,. The estimated
elasticity with respect to regressor 1 for observation I is
For given levels of the regressors at observation 1, the estimated asymptotic standard error of
;7;., (Miller, Capps, and Wells) is
whele the xrterisk * denotes evnlualions a~ sampir mc;~ns.
240
E. Pag:r latos and R. Sorensen, Elasticity of industry demand
Table 1
1972
U.S. fo ..d and tobacco industr; elasticity estrmates.
._~ ___ .~__ _. ~.__~.~~~___ - -.~~-
Mean Standard 1672 Standard
elasticity error *:lasticity &iiQi
SIC code & industry (EL)
W,,,)
(EL72)
w-h. 72)
2011
2013
2016 & 2017
3021
2022
2023
2024
2026
2032
2033
2034
2035
-mm 9. ml0
&,I La, &-I
2041
2043
2044
2045
2046
2047
2048
2051
2e.52
2061
2062 & 2063
2065
2066
2067
2074
2075
2076
2077
21179
.?082
2933
2084
TI85
20X6
2087
209 1
2092
2095
2098
II!
11
zi;i
2141
Meatpacking plants
Meat rrocessing plants
Poult v dressing plants
Creamery butter
Cheese, natural and processed
Condensed B evaporated milk
Ice cream & frozen desserts
Fluid mt!k
Canned specialities
Cannc:d fruits & vegetables
Dehydrated fruits & vegetables
&rckles, sauces & salad dressings
rY-,.<.+- r*..:+., P. ..,,xrl.lz.
I LULLI IIUlLJ lx. rGgGrwGa
Flour 82 grain ml11 p;cducts
Cereal breakfast foods
Milled rice
Blended and prepared flour
Wet corn milling
Pet food
Prepared feeds
Eread & bakery products
Cookies Pr crack-is
Raw cane sugar
Cane & beet relining
Confectmnery products
Chocolate & cocoa produc!s
Chewma gum
Cottonsxd c;il mills
Soybean oil mills
Vegerable oil mills
Animal & marine fats & oils
Shortening, cooking oil & margarine
Malt beverages
Malt
Wines, brandy & brandy spirits
Drstiiled liquor
Soft drinks
Flavoring .tracts & synps
Canned & urt J ~afoods
Fresh & frf*zer packap;d fish
Roasted ,ZI fee
Macarom. +a ;hutti & noodles
Cigarettes
C1gWi
Chewing 4 . . moklup tobacco
Stemmed &: ~-tJri d tobacco
- 0.703
- 0.648
-0.5L!
-0.418
-0.585
- 3.262
-0.349
-0.172
- 0.364
-0 229
-0.207
-0.232
- 0.247
- 0.082
-0.031
-0.251
- 0.035
- 0.054
-0.061
-0.102
- 0.220
-0.188
-0.019
-0.131
--0.074
-0.304
-0.lb7
- 0.009
-0.275
- 0.222
- 0.067
- 0.2%
-O/.83
-0 232
- 0.198
-0.033
-&X2
- 0.008
--0 736
-0.695
-0.120
-0.102
-0.107
--0.756
-0.105
-0.306
0.0898
0.1364
0.0706
0.2116
0.2850
0.0554
0.1361
0.050
N363
0.1:.2
0.11&5
0.0186
6, c 0-o
Ll.1 IOLO
0.3372
0.0959
(I.1059
1.0173
0.0257
0.0400
0.0622
0.0751
0.1135
0.0242
0.0273
0.0260
0.0440
0.0454
0.1780
0.0830
0.3200
0.0285
0.0570
0.1781
0.1012
0.5421
nnmc
Y. I Y.,
Pl180
0.0256
0 2729
0.2795
0.0429
0.0689
0.2673
0.5497
0.0905
0.2786
-0.671
- 0.574
- 0.296
-0.518
- 0.495
-0.415
-0.359
-0.237
- 0.056
--0.193
-0.1?9
-0.197
-0.240
- 0.070
- 0.030
-0.184
- 0.037
- 0.037
- 0.059
-0.081
-0.213
-0.173
-0.018
-0.109
- 0.070
-0.308
- 0.205
-0.014
-0.174
-0.313
- 0.070
-0.185
-0.218
-0.180
-0.237
no31
>.V_>
- 0.042
- 0.006
- 0.559
- 0.848
- -0.109
- OT.96
-0.123
-0.7-11
-0.166
- 0.373
0.0282
0.1153
0.0229
0.1645
C.1620
0.0914
0.1274
0.0424
0.0313
0.0719
0.0795
0.0795
0.0658
0.0279
0.0875
0.0532
0.0186
0.0165
il.0423
0.0498
0.0448
0.0839
0.0236
0.0210
0.0265
0.0501
O.G51G
0.2803
0.0427
0.4956
0.030 1
0.0316
C 1365
0.0821
0.6492
0.0520
0.0964
0.0193
0.1919
0.3773
0.0272
0.0560
0.2805
0.952 i
0.1523
0.1829
The mean elasticity estimates uniformiy reveal price elasticities Beirut
unity, a resui. iii line with the available c&~~ates of U.S. food demand. The
values range ram a high cf -0.756 for cigars to a low of 0.008 for fla~~~ri~tp
extracts and syrups in our sample. Our estimates are reasonably ~10s.~ TV the
elasticity estimates obtained by Brandow (1961) and George and King (:??I,
that could be matched to our industry classifications. For example, tt:ir
estimate of the elasticity for meat :;
-0.65, for cheese -0.46, for evapu-ated
milk -0.30, for bread and bakery products -0.15, and for canned vegetables
- 0.22.
The abso!.ute value of each industrys demand elasticity presented in
table 1 was -hen utilized as the dependent variable of the econometric modei
specified in the following section. This variable was designated as:
EL -the absoh:te value of the estimated demand elasticity computed at the
means and for 1972 for each industry.
Higher absolute values of demand elasticity (EL) denote a relatively more
elastic industry demand.
3. Determinants of price elasticity of demand
Why do price elasticities of demand differ across industries? Several
hypotheses about the determinants of price elasticity have been suggested in
41
LI X Sx ak ~. For example, according to Scitovsky ( 1951, pp. 289-293) XX!
Stigler (1921, pp. 44-48), the major factors that influence the elasticity ot
demand for a product include the availability and closeness of substitutes for
the product, the degree ta which the product is a complement to other
goods, the level of information in the market regarding the product and its
substitutes, and the competitive behavior of the firms in the market in which
the product is sold.3
T$e greater the availability of close substitutes for a product, the larger
should be the magnitude of the substitution efiect of a price change, and
hence the greater should be its price elasticity of demand. On the other hand,
%ther frequently mentioned factn~ are the degree to which the product is considered ;i
necessity ant the percentage of buyers income spent on the product. Aside from the problem of
determining the degree of necessity of a good, it is not clear theoretically that price elas:ici!ies
and necessitlt are r4akd. As Friedman (1962, p. 22) points out, if consunlers are in equilibrium.
thus receiving the same additional utility per dollar for each good purchased, it must be the case
that each g.oad is equally necessary or unnecessary. Theory also questions whether the
percentage of income sprnt on a product shouid affect price elrrsticiry. Thr common :,rgument IS
lhdt a price reduction ofi a gr>od for which a large percentage of income is being spent geneidtes
a large real income effect r.nd hence leads to an increase in purchases. Price elasticity, hoivever,
measures the proportionate increase in purchases. This may be quite small, since the amount of
a good already being consumed may be large.
Iiidecd, the degree of necessity and Ihe
proportion c,f income spent on a good are more likely rel::lcd to irxctmc ciasliclcy rather :han
price elasticity.
242 E. Pagoulatos and R. Sorensen, Elasticity of indusrry demand
the more complemmtary a product is to other goods in consumption or
production, the smalle; should be its elasticity of demand. Complementarity
. .
a& to i&.uCt: iiie Si.ibSiitilti~~ QJ G-I L~AL.WW
nfpt
CA-~ a change in the products price
results in a less than proportional
e change in the prices of the various
csmplement combinations to which it belongs. The availability of substitutes
and the existence of complements, however, only partially determine the
magnitude of the substituiion effect. This effect depends also upon the
awareness of market participants of the existence and nature of competing
offers. The response to a price change will be larger the more knowledge
market
participants have about alternatives. Price elasticity should thus be
greater the better the vel of information in the market. Finally, price
elasticity of market den::.,nd should be affected by the extent of collusion of
films and the ease of enrr-y in the industry.
Direct quantitative measures of these major determinants of market price
elasticity of demand are not readily available. Instead, in order to empirically
investigate the determinants of industry elasticities we proceed indirectly by
identifying variabies that are expected to influence the degree of substituta-
bility and complementarity of products, the level of market information, and
the competitive behavior of fnms across industries.4
One important class of factors that should affect the degree of substitution
and the level of information in the mark& are strategic activities undertaken
to differentiate their products. Differentiation activities are pursued in a
variety of ways, including modification of the characteristics of products,
introduction of XV ~~od:rsts and proliferation of brands, as well as
advertising and promo ~;P.~ Selling activities may, therefore, affect demand
elasticity by increasir. le appeal of an industrys product resulting in a
reduction in its percc substitutability. In addition, selling activities will
also &et the dcgrcc nformation possessed by market participants. In
order to account for ti :: factors, several variables were included in the
model.
The first variable is rhc: total number of brands (BN) offered by sellers in
the industry. The number 01 brands available should influence both the level
of information in the market and the degree of substitutability for the
industrys product. In order for consumers to be informed about the prices
and qualities of various
goods, they must underrake search activities.
Obtainir , d given level of information, however, reqclires greater search costs
as the number of brands to be evaluated increases. This implies that given
in this: paper xc examine the determinants of industry demand elasticity rather than brand
or tirm elasticity. For a recent compartson between rirm ievei and industry levei demand
functions under oligopolistic conditions, see Shapouri, Folwell and Baritelle (1981).
52ndeed as Connor (1981b) and Padberg and Westgren (1979) argue, product proliferation
(new foodproduct introduction) is the most signiicant type of competitive conduct by U.S. food
and tobacco manufacturing firms.
the level of benefits and hence the optimal amount of search, consumers will
obtain less information in markets in which the number of brands is larger.
Increases in the number of brands may also act to reduce substitutability by
$hng Ei; pro&z<; X2 that \IVJll!~ qhPVq~CI;sP GW;Ct ?Wrd thn r I-,?.- I--.
9 . %..._a 1.w. w c * YlrUL uLIIu rlld3 heap ~~~33 from
moving to alternatives. Both of these arguments suggest that increases in the
number of brands should reduce industry price elasticity of demand. The
variable included to represent brand prohferation in an industry is:
BN- the number of brands sold in a particular industry in 1975. The data
fcr the number of brands was obtained from Connor and Mather
(1978).
The cost and benefits of search and therefore the level of information in
the market will be influenced not only by the number of brands, but also by
the rate of turnover of brands. In general, the higher the rate of turnover of
brands, the lower would be the level of information possessed by buyers. As
old brands are withdrawn from the market, a portion of the stock of
information exists initially for new brands entering the market. Finally, the
faster the turnover in brands, the greater is ?he rate of depreciation of
consumer information and the smaller is the optimal amount of search. The
net result is that high brand turnover should be associated with !;-zr levels
of information and lower price elasticities of demand.
Since direct information on the rate of brar.d tnrr.~vt~ in a particular
industry is unavailable, a reasonable proxy for this variable can be found in
the extent of research and development activities by firms in the industry. As
ronnor (1pgjb) pi nt s Ok i t , t he maj or i t y of r esezar r h I .:?d APx7Cl'n-YZ~i*;
_"I&AU& ..w.""p
expenditures undertaken by U.S. food processing firms is aimed at product
rather than process development. It is expected, therefore, that these
expenditures should be highly correlated with the isite of new product
development and introduction. Thus, as a proxy for the rate of brand
turnover, research and development expenditures as a percent of domestic
sales (R&D/L%) is included as an explanatory variable and is expected to be
negatively related to (EL). This variable is defined as:
R&D/DS - the R&D expenditures to domestic saies ratio in 1975. The data
for this variable were obtained from Connor and Mather.
Also included in the model is the ratio of ir.dustry advertising expenditures
to domestic sales (A/DS). Since advertising may affect the degree of sub-
stitutability and the level af information in a variety of ways, it is impossible
a priori to predict the direction of the relationship between adverGsing and
elasticity. To the extent that advertising establishes, main!ains, or i~crca~s
the appeal fer an industrys product, substitutability is decreased as is price
elasticity of demand. On the other hand. advertising represents a maior
source of information to consumers. If advertising dots incrcasc ?he amount
244
E. Pagoulatos and R. Sorensen, Elasticity of imhstry demand
of information in the market, then its effects may be to increase rather than
&~le~sc elasticities of demand. The variable included is defined as:
dA6/ io i$ ~~~
the advertising to domestic sales ratio in 1972 obtained from U.S.
Department of Commerce (1979).
4 final factor that may act to prevent substitution in response to a price
change is the
existence of tacit or explicit c~~l,~~sion to restrict price
competition in a market. More generally, demirnd elasticity could be a
function of the number of actual and potential competitors in an industry. In
order to capture the probability of collusion and ease of entry in an industry.
the follovr ing variablca were iccLded:
CR4 -the four-firm industry ;oncentratian ratio for 1972 as reported by
the Census of Manufuctures,
KKEQ - the capita! requirements calculated as the dollar value of fixed
assets required by a plant of minimum efficient size for 1972
[Pagouiatos and Sorensen (p. 733jJ
EFFT -the effective tariff rate in 1970 obtained from U.S. International
Trade Commission (1975).
The first is the four-firm industry concentration ratio (CR4). Higher levels
of concentration may reduce the degree cf price competition by both
increasing the degree of recognized firm inierdependence and increasing the
effectiveness of collusion (i.e., reducing the cost of establishing and monitor-
ing price agreements). According to Scitovsicy (1951, p. 291) and Ferguson
(1974, p. 59) demand elasticity should decrease with concentration, since tacit
or explicit col!us;an to restrict price competition may prevent substitution in
the market. Aczording to Becker (1971, p. 13) however, price elasticity of
demand should be greater the less the degree of competition, since colluding
firms would attempt to restrict output and raise prices to reach a more
elastic portion of the industry demand curve. The sign predicted for the
-elation of concentration to elasticity is, therefore, indeterminate.
The second variable is a measure of the dollar value of capital required by
a plant of minimum efficient scale (KREQ). This variable measures tl,c
combined effect of barriers attributable to scale economies and absolute
capital requirements. Finally, to account for barriers facing foreign entrants.
the :ffective tariff rate (EFFT) for e~h industry was also included. It is
expected that the thren&
UL and possibility of entry should increase the scope of
substrt ition in the market and raise the elasticity of demand [Ferguson
(1974, k 59)]. Thus, the height of domestic entry barriers (MREQ) and the
1
E& of Lwier; to foreign entry (EFFT) should be negatively related to tl:~
price e!as&,ity of market demand.
To account for differences in corn lementarity across industries, a final
variable is incmded to meas~lre the stage of production of each iridtrstry. In
l_-C\p_!S[ tc
*nAr
bU pr~dnzd f~- finni demand, intermediate gocds are
expiicilly purct:aa& tc, kc: 1lCcd ir. 2
1 .
comnlm?wnt2? id relatlon<hln CVI~~I (vi:i<;
-----r- a I
inputs. Xntermzdiate or prcbducer goods are therefore expected to have Ipwer
price elasticities of demand. The measure of the stage of production for each
industry was calculated as the percentage of total industry output sold to the
final demand sector (CD/S):
CD/S -the percentage of industry output sold to the final demand sector for
1972, computed with data from U.S. Department of Commerce
(1979).
As the percentage of industry output that is sold tc the consumer secior
(CD/S) increases, the elasticity of demand for the industrys products should
be higher [Martin (1982, p. 59)].
The resulting equation for the price elasticity of demand with the expected
sign indicated below each independent variable is thus,
EL=f CRWD/S,R&D/DS,
f +
-
f - -
4. Empirical results
V/F: now turn to the estimation of the model and the statistical rcr.i:Z. The
mode! was tested using multiple linear regression analysis on cross-sectional
data for the 46 mostly 4-digit SIC. U.S. food and tobacco manufacturing
industries. Since estimates of the variance of each observation on the
dependent varzables are available, the estimation technique utilized in the
:oss-sectional regressions is weighted least squares (WLS). This weighting
:chnique weights each observation for all variables, endogenous and exogen-
ous, by the inverse of the estimated standard error of the dependent variable
and gives more efficient estimates than the use of ordinary leas; squares on
the origkal data.
The results of the WLS estimations for both the mean elasticity and the
1972 elasticity are provicieci in table 2. The weights used in the estimation
procedure are the inve;jes of t\e standard errors of the two elasticities. The
dependent variable is the akicolute value of the estimated indus _j elasticities.
lhus, positive coefficients indicate that the marginal. cfkct of the fariabk is
to make demand more elastic while negative coefirient, impiy the opoosite.
The t values for each of the estimated coefkients arz provided iI: the
The results presented in table 2 generally conform to Iheoretical expec-
tation. Both the mean elasticity and the 1972 elasticity equations yield
remarkably similar overall results, with the r972 eqz;ation h;!vimg a kztte!
statistical fit as expecteU.
4 Of narticrllar interest are the results cnX3rninF tk
_
l-k,
E. Pcgoulatos and R. Soreruen, Elasticity of ih.stry demand
Mult!ple regression equations of industry demand
elasticities.
Me.an elasticiSy 1972 elasticity
(EL)
(EL72)
Intercept
CR4
CD/S
R&D,DS
A/OS
blv
R2
F
224.57
(5.74)b
0.3 -7
(2.65)b
~. .^a
lJ.lYJ
( 3.06)b
- 17.83
(2.G$C
- 322.56
( j.22)b
- 0.0072
(0.292)
,. x,.
- L.W
(1.78)
- 0.053
(2,24)
0.297
2.29
210.84
( 2.70)b
0.641
(3.24)b
0.337
(4.24)b
- 34.96
(=..47)b
- i48.52
(3.82)b
0.0007
(0.021)
. *a
-4.34
(2.27)
- 0.094
(Z68)b
0.4?4
4.90b
Bt-statisiics are shown in parentheses.
bCoefkient is s&n!?ican; at the O.OI level.
Zceficient is significant at the 0.05 level.
vdriables measuring the Strate@C XtiVitkS of firms and the le& of i&x-
mation in tile market (R&D/DS, &QS and BN).6 The signs of the research
and dcA r\--nn
IL,UPIIIClllt znd the advertising intensity variables indicate that their
effects are to reduce demand elasticities, and each variable is statistically
significant at the 10 percent level or better.7 The number of brands in an
industry, however, has no significant effect on demand elasticities. Taken
11 is impcrtant to note here that the estimates of the elasticities were obtained from separate
time-series regressions for individual industries where the only explanatory variables were own
price and income. However, some of the regressor variables used in the cross-sectional
regressions explaining eksticity, such as advertising intensity and the number of brands, are
assumed to affect demand elasticity in a purely cross-sectional sense and have no impact on the
level of demand. advertising and the number of brands may also have some time variatio., and
affect demand over time. Thus, if time series data become dvaiiable, it would be interesting to
examine direcAy the effect of these variables 3~ elasticities by including them in individial
industry demand quations.
-Poteniially a problem of reverse causation may arise between the elastiaky and advertising
gariable, since theories of optimal advertising predict that the advertising to sales ratio depends
upon the elasticity of demand [Dorfman and Siemer (!954)]. These theories, however, deal with
the elasticity of demand for :he ipdividuai Sirm lather than the industry. Since our results deal
with industry elasticities, the problem c f reverse causation is unlikely.
together. there results are consistent \li.iPh rhc Ii, pctahs~is rh,if &n13nti
elasticities are stronglv influenced by activities UIP,&T~,~/\~R i-i\, i:rmY th;ii
make complete ;nformation more dihicult to obtain or enhance the dppcdl i>i
the product. More s~ecifrcall~, our results undersi;ore rhc hlpii;tanii: d
product daerentiation an; new-product competition in reducing industry
elasticity of demand in U.S. food and tobacco manufacturing.
Our results confirm the importance of the variable depicting the stage of
production for each industry (CD/s) which is statistically significant at the 1
percent level and displays the expected sign. Thus, the hypothesis that
elasticities of derived or intermediate demand are lower than those of final
demand also receives support from the results.
The four-firm industry concentration ratio has a significant positive effect
on price elasticity of demand. This result supporls Bet-kers view that demand
elasticity will be greater the lower the degree of competition in the ind-lstry.
The proxies for domestic (KREQ) and foreign (EFFT) entry displa:; the
expected negative sign and are statistically significant at the 5 percent level
or better. It appears, therefore, that the degree of protection in an industry
against domestic and/or foreign, entry reduces the availability of substitutes
and lowers the price elasticity of demand.
5. Couclusions
This paper has presented estimates of price elasticities of demand for a
sample of U.S. food and tobacco industries and has tested a modei that
explains the factors that create inter-industry differences in demand elasticity.
The empirical results are consistent with the hypo+hLjis that demand
elasticity is in part determined by the strategic behavior of firms within an
industry. In particular, activities which make the obtaining of information
more difficult and costly or enhance the appeal of a product result in lower
price elasticities of demand. This suggests that rather than being an
exogenous element of market structure, demand elasticity is actually molded
to some degree by the nature of the conduct of Erms. Whether this
conclusion can be extended to industries beyond those in our sample is a
question that awaits further empirical anaiysis.
0

b
s
e
r
-

v
a
t
i
o
n

I
n
d
u
s
t
r
y

M
e
a
n

Z
S

c
o
d
e

e
l
a
s
t
.

I
N
D

P
E
L

T
a
b
l
e

A
.
1

-
-

S
t
d
.

e
r
r
o
r

S
t
d
.

e
r
r
o
r

C
o
n
s
u
m
e
r

m
e
a
n

1
9
7
2

1
9
7
2

C
o
n
c
e
n
-

d
e
m
a
n
d
/

N
o
.

R
&
D
/
d
o
m
.

A
d
v
e
r
t
.
/

C
a
p
i
t
a
l

E
f
f
e
c
t
i
v
e

e
l
a
s
t
.

e
l
a
s
t
.

e
l
a
s
t
.

t
r
a
t
i
o
n

s
a
l
e
s

b
r
a
n
d
s

s
a
l
e
s

d
o
m
.

s
a
l
e
s

r
e
q
u
i
r
e
m
.

t
a
r
i
f
f

S
T
E
P
L

P
E
L
7
2

S
T
E
P
L
7
2

C
R
4

C
D
/
S

B
N

R
D
/
D
S

A
I
D
S

K
R
E
Q

E
F
F
T

1

2
0
1
1

0
.
7
0
3

0
.
0
8
9
7
6
1

0
.
6
7
1

0
.
0
2
8
2
3
7

2
2

5
6
.
3
4

4
5

O
.
O
O
O
O
O
O

0
.
0
1
1
3
8
8

0
.
4
1
9
4

8
.
9

2

2
0
1
3

0
.
6
4
8

0
.
1
3
6
4
1
8

0
.
5
7
4

0
.
1
1
5
3
2
3

1
9

8
3
.
8
2

2
3
2

0
.
1
9
0
5
3
9

0
.
0
1
3
3
3
8

-
0
.
1
8
3
9

1
2
.
0

3

2
0
1
6

0
.
5
2
1

0
.
0
7
0
5
9
0

0
.
2
9
6

0
.
0
2
2
8
7
3
6

1
8

6
6
.
2
9

3
5

0
.
1
5
1
0
6
6

0
.
0
1
8
1
2
8

-

1
.
1
7
7
7

1
0
.
3

4

2
0
2
1

0
.
4
1
8

0
.
2
1
1
5
8
6

0
.
5
1
8

0
.
1
6
4
5
4
1

4
5

4
2
.
5
5

4
1

0
.
3
0
8
0
9
0

0
.
0
1
8
7
9
4

-

1
.
8
5
7
9

4
6
.
7

5

2
0
2
2

0
.
5
8
5

0
.
2
8
4
9
5
7

0
.
4
9
5

0
.
1
6
1
9
6
9

4
2

6
1
.
0
6

1
1
4

0
.
2
8
7
2
6
1

0
.
0
2
6
5
2
4

-

0
.
7
2
5
7

2
9
.
6

6

2
0
2
3

0
.
2
6
2

0
.
0
5
5
4
1
9

0
.
4
1
5

0
.
0
9
1
3
5
2

3
9

4
7
.
2
8

4
9

0
.
3
7
1
4
1
0

0
.
0
3
2
8
9
6

0
.
6
9
2
1

5
0
.
0

7

2
0
2
4

0
.
3
4
9

0
.
1
3
6
1
0
6

0
.
3
5
9

0
.
1
2
7
3
5
7

2
9

6
3
.
5
3

1
1
0

0
.
3
0
0
2
5
6

0
.
0
3
0
2
2
6

0
.
1
7
4
0

4
1
.
2

8

2
0
2
6

0
.
1
7
2

0
.
0
5
0
7
0
1

0
.
2
3
7

0
.
0
4
2
4
2
6

1
8

6
8
.
2
5

2
6
3

0
.
2
8
0
0
4
4

0
.
0
1
5
7
0
2

-
0
.
1
5
0
8

1
1
4
.
6

9

2
0
3
2

0
.
0
6
4

0
.
0
3
6
0
3
7

0
.
0
5
6

0
.
0
3
1
2
5
0

6
7

9
4
.
1
8

1
0
9

0
.
6
5
3
4
8
6

0
.
0
6
8
9
6
8

2
.
5
4
0
3

3
6
.
8

1
0

2
0
3
3

0
.
2
2
9

0
.
1
2
2
1
5
5

0
.
1
9
3

0
.
0
7
1
9
4
8

2
0

7
7
.
5
5

2
7
1

0
.
4
1
2
8
3
0

0
.
0
2
6
0
1
8

1
.
0
4
3
1

3
6
.
8

1
1

2
0
3
4

0
.
2
0
7

0
.
1
1
0
6
3
9

0
.
1
7
9

0
.
0
7
9
4
7
0

3
3

5
3
.
1
0

4
2

0
.
4
2
3
9
9
4

0
.
0
5
3
3
1
7

1
.
0
4
9
4

3
6
.
8

1
2

2
0
1
3

5

0
.
2
3
2

0
.
0
9
8
5
8
0

0
.
1
9
7

0
.
0
7
9
5
3
5

3
3

7
2
.
3
7

1
1
5

0
.
4
6
4
9
4
8

0
.
0
8
4
2
8
4

0
.
3
3
6
4
7

-

2
0
.
0

1
3

2
0
3
7

0
.
2
4
7

0
.
0
8
2
8
0
3

0
.
2
4
0

0
.
0
6
5
7
8
6

3
6

8
0
.
5
8

1
9
5

0
.
5
0
2
7
5
9

0
.
0
3
8
2
1
0

1
.
1
6
0
0
2

2
4
.
0

1
4

2
0
4
1

0
.
0
8
2

0
.
0
3
7
2
0
0

0
.
0
7
0

0
.
0
2
7
9
1
0

3
3

1
8
.
9
2

4
2

0
.
1
7
5
5
8
6

0
.
0
3
8
3
1
9

0
.
1
9
6
8
5

3
4
.
8

1
5

2
0
4
3

0
.
0
3
1

0
.
0
9
5
8
8
1

0
.
0
3
0

0
.
0
8
7
5
4
7

9
0

9
1
.
5
9

1
2
1

0
.
9
2
4
6
2
2

0
.
1
1
2
2
9
0

3
.
6
3
3
6
6

7
0
.
0

1
6

2
0
4
4

0
.
2
5
1

0
.
1
0
5
8
9
5

0
.
1
8
4

0
.
0
5
3
2
2
6

4
3

2
5
.
0
0

2
5

O
.
O
O
O
O
O
0

0
.
0
4
8
1
9
1

0
.
4
9
4
7
0

9
0
.
2

1
7

2
0
4
5

0
.
0
3
5

0
.
0
1
7
3
0
8

0
.
0
3
7

0
.
0
1
8
5
9
3

6
8

7
8
.
2
5

8
6

0
.
7
0
1
4
9
1

0
.
0
4
4
2
9
4

1
.
6
5
9
3
7

7
0
.
0

1
8

2
0
4
6

0
.
0
5
4

0
.
0
2
5
7
0
5

0
.
0
3
7

0
.
0
1
6
5
2
0

6
3

6
.
4
2

1
9

0
.
5
8
8
5
9
5

0
.
0
1
1
6
6
5

3
.
8
8
3
1
3

1
5
.
0

1
9

2
0
4
7

0
.
0
6
1

0
.
0
4
O
O
O
O

0
.
0
5
9

0
.
0
4
2
3
4
3

5
1

8
9
.
8
2

2
0

2
0
4
8

0
.
1
0
2

0
.
0
6
2
2
4
9

0
.
0
8

1

0
.
0
4
9
7
6
3

2
3

1
.
3
0

2
1

2
0
5
1

0
.
2
2
0

0
.
0
7
5
0
8
4

0
.
2
1
3

0
.
0
4
4
7
9
9

2
9

7
8
.
1
4

2
2

2
0
5
2

0
.
1
3
8

0
.
1
1
3
5
2
6

0
.
1
7
3

0
.
0
8
3
8

5

5
9

9
5
.
0
8

2
3

2
0
6
1

0
.
0
1
9

0
.
0
2
4
2
1
7

0
.
0
1
8

0
.
0
2
3
5
6
8

4
4

3
1
.
8
7

2
4

2
0
6
2

0
.
1
3
1

0
.
0
2
7
3
4
8

0
.
1
0
9

0
.
0
2
1
0
3
6

6
1

3
1
.
8
7

2
5

2
0
6
5

0
.
0
7
4

0
.
0
2
5
9
6
2

0
.
0
7
0

0
.
0
2
6
5
3
4

3
2

7
9
.
2
0

2
6

2
0
6
6

0
.
3
0
4

0
.
0
4
4
0
2
8

0
.
3
0
8

0
.
0
5
0
1
1
7

7
4

5
3
.
4
4

2
7

2
0
6
7

0
.
1
8
7

0
.
0
4
5
3
5
1

0
.
2
0
5

0
.
0
5
0
9
5
6

8
7

9
1
.
6
0

2
8

2
0
7
4

0
.
0
0
9

0
.
1
7
7
6
6
5

0
.
0
1
4

0
.
2
8
0
3
0

1

4
3

0
.
0
1

2
9

2
0
7
5

0
.
2
7
5

0
.
0
8
3
0
4
2

0
.
1
7
4

0
.
0
4
2
7
4
2

5
4

1
.
1
4

3
0

2
0
7
6

0
.
2
2
2

0
.
3

1
9
9
7
9

0
.
3
1
3

0
.
4
9
5
5
6
1

7
0

0
.
0
1

3
1

2
0
7
7

0
.
0
6
7

0
.
0
2
8
4
9
6

0
.
0
7
0

0
.
0
3
0
1
4
0

2
8

0
.
0
1

3
2

2
0
7
9

0
.
2
5
0

0
.
0
5
7
0
4
3

0
.
1
8
5

0
.
0
3
1
6
0
3

4
4

4
9
.
4
7

3
3

2
0
8
2

0
.
2
8
3

0
.
1
7
8
0
7
4

0
.
2
1
8

0
.
1
3
6
4
9
0

5
2

7
0
.
3
1

3
4

2
0
8
3

0
.
2
2
2

0
.
1
0
1
1
8
9

0
.
1
8
0

0
.
0
8
2
1
4
9

4
8

0
.
0
1

3
5

2
0
8
4

0
.
1
9
8

0
.
5
4
2
0
7
6

0
.
2
3
7

0
.
6
4
9
1
6
6

5
3

7
1
.
6
4

3
6

2
0
8
5

0
.
0
3
3

0
.
0
7
8
4
8
2

0
.
0
2
3

0
.
0
5
2
0
3

1

4
7

7
0
.
5
9

3
7

2
0
8
6

0
.
0
5
2

0
.
1
1
8
0
2
8

0
.
0
4
2

0
.
0
9
6
3
6
5

1
4

8
9
.
7
9

3
8

2
0
8
7

0
.
0
0
8

0
.
0
2
5
6
0
3

0
.
0
0
6

0
.
0
1
9
3
1
3

6
6

7
.
5
0

3
9

2
0
9
1

0
.
7
3
6

0
.
2
7
2
9
0
3

0
.
5
5
9

0
.
1
9
1
8
6
6

5
0

9
5
.
1
9

4
0

2
0
9
2

0
.
6
9
5

0
.
2
7
9
4
7
2

0
.
8
4
8

0
.
3
7
7
3
2
4

2
0

3
1
.
0
4

4
1

2
0
9
5

.
I
2
0

0
.
0
4
2
8
5
2

0
.
1
0
9

0
.
0
2
7
2
2
2

a
:

7
6
.
1
7

4
2

2
0
9
8

0
.
1
0
2

0
.
0
6
8
8
6
0

0
.
0
9
6

0
.
0
5
5
9
8
4

3
8

8
2
.
5
5

4
3

2
1
1
1

O
.
l
C
7

0
.
2
6
7
3
1
6

0
.
1
2
3

0
.
2
8
0
4
5
3

8
4

9
4
.
5
5

4
4

2
i
2
1

0
.
7
5
6

0
.
5
4
9
7
4
5

0
.
7
4
1

0
.
9
5
2
1
2
2

5
6

9
4
.
5
3

4
5

2
1
3
1

0
.
1
0
5

0
.
0
9
0
4
9
2

0
.
1
6
6

0
.
1
5
2
3
2
7

7
1

9
4
.
5
9

4
6

2
1
4
1

0
.
3
0
6

0
.
2
7
8
5
9

1

0
.
3
7
3

0
.
1
8
2
9
1
8

6
7

0
.
0
1

1
7
0

5
2

1
5
7

9
8

1

3
5

1
2
8

6
1

3
1

1

2
7

1

1

8
8

3
4

3
0
6

4
2
0

1
5
0

4
6

2
0

2
0

8
9

3
0

1
9
3

5
1

5
9

1

0
.
3
9
8
1
2
2

0
.
0
7
2
2
5
9

-
0
.
1
5
3
1
5

3
8
.
3

0
.
4
0
2
9
8
8

0
.
0
2
2
6
6
8

-
0
.
1
5
3
1
5

2
1
.
8

0
.
1
m
5

0
.
0
2
6
8
2
5

0
.
8
7
5
4
7

J
.
9

0
.
3
4
1
8
0
8

0
.
0
2
6
1
7
3

2
.
4
8
5
9

1

8
.
5

O
.
o
o
o
o
o
O

0
.
0
1
2
2
1
4
0

1
.
6
2
9
2
4

2
0
9
.
3

0
.
2
9
9
6
3
2

0
.
0
1
0
7
8
6
7

1
.
9
9
2
5
2

2
0
9
.
3

0
.
1
9
7
3
6
7

0
.
0
4
8
9
4
7
1

1
.
5
2
8
4
4

2
9
.
1

0
.
2
6
7
8
6
5

0
.
0
3
7
0
5
4
6

1
.
9
8
5
8
2

5
6
.
2

0
.
5
0
0
7
8
d

0
.
0
6
1
2
9
6
5

1
.
8
3
5
7
8

2
8
.
2

O
.
o
o
o
o
o
O

0
.
0
1
6
2
5
1
8

0
.
0
2
4
6
9

4
6
5
.
9

0
.
2
4
5
6
9
6

0
.
0
0
9
5
8
2
2

0
.
0
0
7
9
7

2
5
2
.
9

O
.
O
O
O
O
O
O

0
.
0
2
3
6
4
1
8

-
0
.
4
9
1
0
2

3
5
.
5

0
.
m

0
.
0
1
6
0
0
?
7

-

0
.
5
7
8
0
3

9
2
.
9

0
.
3
0
3
9
7
7

0
.
0
4
6
5
0
8
4

0
.
9
9
3

:

5

9
2
.
9

0
.
4
2
6
0
2
0

0
.
0
5
3
7
9
7
4

3
.
4
3
4
7
6

2
0
.
1

P
.
o
o
o
o
o
O

0
.
0
1
1
3
6
1

0
.
5
%
4
5

1
0
.
0

0
.
1
6
4
5
2
3

0
.
0
4
5
4
9

1

1
.
9
0
6
8
7

3
4
.
9

0
.
3
0
5
7
0
6

0
.
0
4
2
7
9
9

2
.
2
9
0
7

1

5
4
.
2

0
.
2
0
0
1
4
7

0
.
0
7
2
3
5
3

0
.
3
1
1
1
5

7
.
7

0
.
6
8
0
2
5
8

0
.
0
2
7
3
1
5

1
.
3
6
9
4
0

4
2
.
2

O
.
M
K
K
N
I
O

0
.
0
1
8
2
7
7

0
.
2
0
8
6
4

1
5
.
6

0
.
1
5
1
9
8
2

0
.
0
1
0
4
8
7

-

0
.
8
0
2
9
6

1
5
.
6

0
.
7
2
8
2
7
2

0
.
0
4
6
9
9
8

2
.
2
1
7
0
3

2
.
5

0
.
5
8
6
5
2
2

0
.
0
4
5
2
6
0

0
.
4
4
7
2
5

7
.
4

0
.
5
6
6
6
9
6

0
.
0
6
6
3
5
5

3
.
8
3
8
3
4

7
8
.
6

0
.
1
9
6
3
3
5

0
.
0
2
5
1
3
1

0
.
9
4
3
1
3

8
8
.
2

0
.
2
0
9
3
0
8

0
.
1
2
5
2
7
1

1
.
6
0
7
0
4

-
1
1
3
.
2

O
.
o
o
o
o
o
O

0
.
0
1
0
7
9
0

-

0
.
2
6
3
9
7

1
5
.
2

250
E. Pagoulatds and R. Sorensen, Elasticity of industry demand
References
Becker, G.S., 1971, Economic theory (Knopf, New York).
Brandow, GE., 1961, Interrelations among demands for farm products and implications f@r
control of the market supply, Pennsylvania Agricultural Experiment Station Bulletin no. 680
(Pennsylvania State University, University Park, PA).
Comanor, W.S. and T.A. Wilson, 1974, Advertising and market power (Harvard University
Press, Cambridge, MA).
Connor, J.M., 1981a, The U.S. food and tobacco manufacturing industries: Market structure,
structural change, and econu& p&r;;;azce,
p,,m;.c~z!tnr~l Ecozozlics R~r)ort no. 451
(E.S.C.S., U.S.D.A., Washington, DC).
Connor, J.M., 1981b, Food product proliferation: A market structure analysis, American Journal
of Agricultural Economics 63,607-617.
Connor, J.M. arid L.L. Mather, 1978, Directory of the 200 largest U.S. food and tobacco firms,
1975 (E.S.C.S., U.S.D.A. and Project NC-117. Washington, DC).
Cowling, K.. 1976, On the thcdretical specificat..u,r of industrial structure-performance relation-
ships, European Economic Review 8. 1-14.
. Cowling, K., 1982, Morlopoly capitalism (Wiley, New York).
Do&an, R., 1978, Prices and markets, 3rd ed. (St. Martins Press, New York).
Dorfman, R. and P.O. Steiner, 1954, Optimal advertising and optimal quality, American
Economic Review 44,82&836.
Ferguson, J-M., 1974, Ad\ ertising and competition: Theory, measurement, facto (Ballinger,
Cambridge, MA).
Friedman, M., 1962, Price thoery, Revised ed. (Aldine, Chicago, IL).
George, P.S. and G.A. King, 1971, Consumer demand for food comodities in the United States
with projections for 1980, Giannini Foundation Monograph, no. 20 (University of California,
Berkeley, CA).
Johnson, A.C. and P. Helmberger, 1967, Price elasticity of demand as an element of market
structure, American Economic Review 57,1218-1221.
McKean, J.R. and R.D. Peterson, 1973, Demand elasticity, product diflercntiation, and market
structure, Journal of Economic Theory 6,205-209.
Martin, S., 1982, Industry demand characteristics and the structure-performance relationship,
Journal of Economics and Business 34,59 55.
Miller, SE., 0. Capps, Jr. and G.J. Wells. 1984, Confidence intervals for elasticities and
flexibilities from linear equations, American Journal of Agricultural Economics 66,392-396.
Modigliani, F., 1958, New developments on the oligopoly front, Journal of Political Economy
66,215-222.
Needham, D., 1978, The economics of industnal structure, conduct, and performance (St.
Martins Press, New York).
Padberg, D.I. and R.E. Westgren, 1979, Product competition and consumer behavior in the food
industries, American Journal of Agricultural Economics 61,620-625.
Pagoulatos, E. and R. Sorensen, 1981, A simultaneous equation analysis of advertising,
concentration and profitability, Southern Economic JC -nal47,728-741.
Scitovsky, T., 1951, Welfare and competition (Irwin, Chicago, IL).
Shapouri, S., R.J. Folwell and J.L. Baritelle, 1981, Statistical estimation of firm-level demand
functions: A case study in an oligopolistic industry, Agricultural Economic Research 33, 18-
25.
Stigler, G., 1952, The theory of price (Macmillan, New York).
U.S. Department of Agriculture, Agricultural statistics, various issues,
U.S. Department of Agriculture, Food consumption, prices and expenditures. Agricultural
Economics Report no. 138 (E.R.S.) various supplements,
U.S. Department of Commerce, Census of manufacturers, summary snd subject statistics, various
iyes.
U.S. Department of Commerce, Bureau of Economic Analysis, 1979, The detailed input-output
structure of the U.S. economy: 1972, Vols. I and II (U.S.G.P.O., Washington, DC).
U.S. Department of Labor, 1976, Handbook of labor statistics 1975, Bulletin 1865 (U.S.G.P.O.,
Washington, DC).
U.S. International Trade Commission, 1975, Protection in major trading countries, U.S.I.T.C.
Publication no. 737 (Washington, DC).