What Determines the Elasticity of Industry Demand?

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)].