Economic Concentration and Price Inflexibility: Rejoinder

Abstract

P THE major part of Dr. Backman's criticism of my article, Means, Thorp, and Neal on Price Inflexibility, is concerned with my analysis of Thorp. The essence of my position was that Thorp's data, by their very nature, suffered from three and possibly four biases; that these biases operate against appearance of any relationship between concentration and price rigidity; and that they do not appear to be offset by any biases operating in opposite direction. Dr. Backman offers a new body of data which concerns bias resulting from Thorp's inclusion of products . . such as meat, whose costs are made up largely of raw materials and whose prices may therefore be expected to fluctuate more or less in accordance with changes in prices of their raw materials. Inasmuch as prices of these products tend to be highly flexible, question at issue is their level of concentration. If they tend to have high concentration ratios, result is to provide support to my position that their inclusion in Thorp's study tends to operate against appearance of a relationship between concentration and price rigidity. Using information compiled by Means on industries and applying it to Thorp's products, Backman finds that 'raw-materialaffected' products tend to have high concentration ratios. Of 9 I products, I9 had a concentration ratio of over 8o per cent, and 42 products had a ratio between 50 per cent and 8o per cent -or a total of about two-thirds of products in this category. Dr. Backman devotes a considerable amount of attention to bias resulting from Thorp's inclusion of products which are on a delivered price basis in nation as a whole, or at least a broad geographic area and have high ratios of freight costs to delivered prices. Presumably, during depression producers in such industries tended to increase proportion of their shipments made to distant areas, thereby reducing their realized prices. As to incidence of bias within Thorp's of a cross-section, I had listed as examples iron and steel, chemicals, and non-ferrous metals (all highly concentrated products). I added that it is difficult to find within sample any products of this type which have low concentration ratios. Backman's criticism does not go to incidence of bias, but only to its extent within iron and steel, chemicals, and non-ferrous metals. This is done through comparisons of Census price declines with BLS price declines. Although in two of three groups (iron and steel and chemicals) ' he finds Census price declines to have been greater than those of corresponding BLS series (thus again buttressing my position), not too much weight should be given to these comparisons because of differences in product definitions. The next bias stems from understatement of concentration in market resulting from use of concentration ratios on a national basis for products sold largely on a local or regional basis. Here, Backman conveys impression that class of products which I had cited (stone, clay, and glass) represents totality of products affected by bias. His conclusion, of course, is that they are so few in number as not to alter the general conclusion of Crowder-Thorp study. This, despite fact that I had specifically labelled these products as merely illustrations of bias.2 With respect to fourth bias, i.e. shift during a downswing to lower-priced items within a Census product (which can occur because of excessive breadth of many of Census product definitions), Backman quotes and then attacks an hypothesis which I had advanced to effect that bias may be more important in products of high than of low concentration. In quoting me, however, he omitted sentences setting forth central reason underlying hypothesis; effect is to reduce my argument to level of assertion. The full passage quoted