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Pricing and Industry Structure when Demand Elasticity Changes

Author

Listed:
  • Jean-Paul Chavas

    (University of Wisconsin)

  • Guanming Shi

    (University of Wisconsin)

  • Kyle Stiegert

    (University of Wisconsin)

Abstract

This paper examines the economics of pricing under imperfect competition. It studies how industry concentration interacts with the elasticity of demand to affect pricing. When the demand elasticity decreases with increased market concentration, it can have significant effects on pricing. This issue is investigated empirically in an analysis of the determinants of nitrogen fertilizer prices in the US. The U.S. nitrogen fertilizer industry is an interesting case study for two reasons: First, it has exhibited increasing concentration over the last few decades. Second, the elasticity of U.S. demand for nitrogen fertilizer has decreased over that time period. Our analysis documents how a more inelastic demand for fertilizer—in addition to increased market concentration—has contributed to higher fertilizer prices.

Suggested Citation

  • Jean-Paul Chavas & Guanming Shi & Kyle Stiegert, 2020. "Pricing and Industry Structure when Demand Elasticity Changes," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 57(4), pages 891-907, December.
    • Handle: RePEc:kap:revind:v:57:y:2020:i:4:d:10.1007_s11151-019-09745-y
    DOI: 10.1007/s11151-019-09745-y
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    Keywords

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    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • Q1 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture

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