Market Demand Elasticity Research Articles

Identifying a dominant firm's market power among sellers of a homogeneous product: an application to Alcoa

This paper measures the extent of Alcoa's (dominant firm) market power in the post-war US aluminium industry. An indirect procedure that combines estimation of the fringe supply elasticity, market demand elasticity, and extant market share data generates the estimate of Alcoa's residual demand elasticity which infers the firm's market power. Results show that Alcoa's market power declines with fringe's expansion.

The social cost of labor in rural development: job creation benefits re‐examined

AbstractJob creation effects are examined as they would apply to social analysis of rural development programming by public or private sector agencies. A synthesis and critique are provided of approaches to valuing the social opportunity cost of labor. These approaches vary according to whether or not unemployment is present in the pre‐project state and according to whether or not there is interregional migration in response to project hiring. Graphical, partial equilibrium analysis illustrates why, in general, job creation and project employment give rise to social costs, not benefits. The magnitude of these social costs is shown to depend upon the presence of payroll taxes, wage subsidies and unemployment, in addition to the market's supply and demand elasticities. These social costs may be reduced or offset in specific instances where projects increase the value of labor's productivity or reduce its costs, such as with job training, worker mobility and skill development projects. Careful attention to these approaches can help society choose correctly among alternative development proposals and among alternative (labor‐intensive versus capital‐intensive) technologies.

Calculators and crystal balls: Predicting journal subscription prices

Subscription price projections are a helpful planning tool for libraries, which must make purchase decisions before actual prices are set. Predicting journal subscription prices requires a combination of art and science. Objective data include information on the publishing environment as well as the overall economic climate in major countries where publishing occurs. Increased manuscript submissions, subscription cancellations, paper and postage costs, and general overhead can all affect how publishers set prices. Currency exchange rates are a major, uncontrollable factor in this global market. A price projection methodology must predict how publishers will factor each of these variables, as well as their overall sense of market demand and price elasticity, into their price-setting decisions. Changes in application of the methodology must be made from time to time to reflect changes within the journal publishing market.

Analysis of Room Taxes Levied on the Lodging Industry

This article summarizes a study of the impacts of room taxes on the lodging industry by (1) reporting on the findings of Phase II of an overall study assessing the negative impacts on number of rooms rented of room taxes levied on the lodging industry, and (2) applying the price elasticity of market demand found in step 1 to the average amounts of room taxes paid, as measured in Phase I of the overall study. The elasticity measurement comes from a statistical model based on data from a national probability survey of the properties owned by members of the American Hotel and Motel Association taken in spring 1990.

Harvest uncertainty and the tragedy of the commons

This paper demonstrates that a fixed number of risk-averse firms faced with harvest uncertainty owing to resource stock uncertainty will typically reduce their exploitation of a commons. In addition, the total exploitation of the industry will decrease when entry is permitted and uncertainty is compared with certainty. This result holds for perfectly competitive output markets and also characterizes imperfectly competitive output markets with linear market demand and risk-neutral firms. In the latter case, the socially optimum number of firms is determined based upon the degree of uncertainty, the price elasticity of market demand, and the elasticity of input productivity.

The measurement of conjectural variations in an oligopoly industry

Using independently derived estimates for the market demand elasticity and firm marginal cost, this paper measures the conjectural variations (cv's) of the eight largest U.S. steel firms for the years 1920 to 1972. Comparisons are then made between the measured cv's and those predicted by certain industry conduct hypotheses. Specifically the hypotheses are those for competitive behavior, Cournot behavior, imperfect collusion, and industry profit maximization (perfect collusion). One of the two extreme theories of firm behavior, industry profit maximization, is rejected, but the acceptance or rejection of the other theories depends on the assumptions made about the cost structure of the sample firms.

Expectations, the commons, and optimal group size

This article derives a formula for the optimal number of exploiters of a commons, whose output is sold in an imperfectly competitive market and whose exploiters hold nonzero or non-Nash conjectures. We express the optimal number of exploiters in terms of the conjecture, the elasticity of input productivity, and the price elasticity of market demand. Consistent conjectures—those that agree with reality—imply the full tragedy of the commons and zero profits for the exploiters.

The Commons and the Optimal Number of Firms

The problem of the is a frequently cited example of market failure in which exploiters' pursuit of profits does not lead to the attainment of a social or Pareto optimum. In particular, a free-access equilibrium induces an unrestricted number of exploiters or firms to equate the variable input's average product, instead of its marginal product, to the input's real rental rate; hence, the rents of the variable input are driven to zero [Haveman, 1973].1 When the number of firms in a commons is unrestricted, the scarce factor (e.g., the fishery, the hunting ground) is not imputed a rent. A social optimum can be achieved if a single firm exploits a commons and sells its output in a perfectly competitive market [Weitzman, 1974]. The purpose of this note is to derive an expression for the optimal number of firms exploiting a commons when the resulting output is sold in an imperfectly competitive market.2 Since demand inelasticity due to monopoly power leads to overconservation, while an increase in the number of exploiting firms typically leads to underconservation, a finite number of firms for a commons can be found corresponding to a social or Pareto optimum. In particular, the optimum number of firms depends directly on the elasticity of the input productivity and inversely on the price elasticity of market demand.

Empirical Uses of the Price-Cost Margin

the direction of the relationship depends on other variables. Dorfman and Steiner [5] have shown that for a single firm, holding all variables other than price and advertising budget constant, at equilibrium its marginal value product of advertising would equal its price elasticity of demand or the reciprocal of the Lerner index for a single firm industry. The price-cost margin, (P -MC) /P, is thus theoretically related to market demand elasticity, the marginal value product of advertising, and under certain restrictive assumptions to concentration. These simple static equilibrium results have provided the basis for a number of empirical studies. Kamerschen [8] has used the ratio P/(P - MC) to calculate market elasticity. A number of authors (see articles by Collins and Preston [3] [4], McFetridge [io], Rhoades [I2], and Shepherd [I4] used the margin as a proxy for industry rate of return on sales. They related it to such variables as concentration, geographic dispersion of industries, industry size, growth rate, diversification and industry capital-output ratios. In general, they found a positive relation between concentration and price-cost margins, and this relation was stronger for consumer than producer goods. Some far-reaching proposals for antitrust policy have been based on such studies. Sherman and Tollison [I5] assumed constant short-run marginal cost equal to variable cost and used (P - MC) /P = I- (VC/P) as a measure of the degree of 'cost fixity' within an industry. They relate their measure of cost fixity to industry rates of return to test the hypothesis that advertising may be technologically induced by relative costs. The purpose of this note is to examine in detail uses of the price-cost margin as a measure of profitability. The empirical results indicate misspecification bias and errors in measuring the price-cost margin biased the relationship between concentration and price-cost margins. Differences in the margin across industries are explained predominately by capital-sales

Price Discrimination for Physicians' Services

This paper develops an alternative model for the discriminatory pricing behavior of physicians. By introducing search cost explicitly, it generates a result that price discrimination will be practiced by all physicians even if the elasticity of market demand is less than one and all or most of the physicians are profit-maximizers. The proposed model also explains the history and the recent trend of pricing behavior in medicine and may further explain some of the political actions of the American Medical Association.

Price, Quality, and Market Share

To understand the behavior of firms and to assess the degree of competition among firms, we need information on the demand function faced by the firm. Despite this, little published work has been forthcoming on the demand for branded goods and two obvious explanations come to mind: the problem of quality variation among brands of the same commodity and the lack of data on market-share behavior. This contribution is largely concerned with developing an operational version of a demand-forbrand model in which quality variation is explicitly recognized. This is accomplished by following up a suggestion made by Griliches (1961) and generating implicit prices for the range of qualitative attributes a commodity possesses. This allows us to construct quality-adjusted prices for each brand which are the correctly specified prices for the demand equation. The model is tested out in the U.K. market for farm tractors and found to give satisfactory results.