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    Mohamed Hussein
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    Rothschild

    Uploaded by

    Mohamed Hussein

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
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    of 1
    250) Rothschild index ‘A measure of the sensitivity to price Of a product group as 2 whole relive 10 the sensitivity of the quantity demanded Df a single frm to 2 change in is price. Monngersal Eeonowies ed Bust reg sustain only a few firms nstries in which demand is geeat, the market ‘may tequire many firms tv ycoduce the quantity demanded. One of our tasks in the remaining chapters is to explain how the degree of market demand affects the decisions of managers. ‘The information accessible to consumers also tends to vary across mar- kets. Ibis very easy for a consumer to find the lowest airfare on a fight from ‘Washington to Los Angeles: all one has to do is calla travel agent (or call four or five airlines) and got price quotes. In contrast it is much more dif- ficult for consumers to obtain information about the best deal on a used cat. ‘The consumer not only has to bargain with potential sellers over the price but also must attempt to ascertain the quality of the used car. As we will learn in subsequent chapters, the optimal docisions of managers will vary depending on the amount of information available in the market Finally, the elasticity of demiand for produets tends to vary from indus- try to indostry. Moreover, the elasticity of demand for an individual firm's product generally will differ from the market elasticity of demand for the product. In some industries, there is a large discrepancy between an individ bal firms elasticity of demand and the market elasticity. The reason for this, can be easily explained. In Chapter 3 we leurned that the demand for a specific product depends fon the number of close substitutes available for the product. As a conse- quence, the demand for a particular brand of product (e.g., Seven Up) will bbe more elastic than the demand for the product group in geuetal (soft drinks). In markets in which there are few close substitutes for a given firm's product, the elasticity of demand for that product will coincide with the market elasticity of demand for the product group (since there is only one produet in the market). In industsies in which many firms produce substi- tutes for a given firm's product, the demand for the individual fr’s product will be more elastic than the overall industry demand. ‘One nieasure of the elasticity of industry demand for a product relative to that of an individual frm is the Rothschild index. The Rouschild index provides 1 measure of the sensitivity to price of the product group as a whole felative to the sensitivity of the quantity demanded of a single firm to a change in its price. The Rothschild index is given by Er Roe where Ey is the elasticity of demand for the total market and Eis the elas- licity of demand for the product of an individual firm, ‘The Rothschild index lakes on a value between O and L. When the index is 1, the individual firm faces a demand curve that has the same sensitivity to price as the market demand curve. In contrast, when the elastivity of Ghepior 7 The Nature nf Pudusee ya Pood _ Sh 4g Soper

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