Pricing and Industry Structure when Demand Elasticity Changes

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.