Dynamic Competition and Price Adjustments

Abstract

The link between price rigidity and market structure has long been a topic of interest to researchers in both macroeconomics and industrial organization. Research on this subject, with its antecedents in the widely debated topic of administered inflation, has gone through several stages. In recent years the focus of research has been on explaining the speed of price adjustment [8; 7; 11; 4; 2; 3]. A parallel line of research has been on the role of entry in disciplining the price behavior of incumbent firms [15; 14; 5]. The current study extends previous work on price adjustment in several important ways. Most importantly, we introduce dynamic elements of competition as measured by several disaggregated measures of domestic and import entry. We are able to evaluate the extent to which price effects of entry into U.S. manufacturing are due to changes in desired prices or to changes in the speed of adjustment to desired prices. We depart from previous studies in that we use pooled data to estimate, by nonlinear regression methods, both the desired (target) price change and the speed of adjustment across industries.