Industry Demand Versus Firm Demand

Market demand functions can be specified for an entire industry or for an individual firm, though somewhat different variables would typically be used in each case. Variables representing competitors' actions would be stressed in firm demand functions. For example, a firm's demand function would typically include competitors' prices and advertising expenditures. Demand for the firm's product line is negatively related to its own prices but positively related to the prices charged by competing firms. Demand for the firm's products would typically increase with its own advertising expenditures, but it could increase or decrease with additional advertising by other firms.

The parameters for specific variables ordinarily differ in industry versus firm demand functions. Consider the positive influence of population on the demand for Ford automobiles as opposed to automobiles in general. Although the effect is positive in each instance, the parameter value in the Ford demand function would be much smaller than that in the industry demand function. Only if Ford had 100 percent of the market—that is, if Ford were the industry— would the parameters for firm and industry demand be identical.

Because firm and industry demand functions differ, different models or equations must be estimated for analyzing these two levels of demand. However, demand concepts developed in this chapter apply to both firm and industry demand functions.

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