Market Structure and the Speed of Price Adjustments: Evidence Of Non-Monotonicity

Abstract

Rational distributed lag and partial adjustment models are used in this paper to analyze the speed of adjustment of consumer deposit rates. Dummy variables conditioned on market concentration are added to the rational distributed lag model to test for speed of adjustment differences across high, medium, and low concentration markets. The estimated model parameters suggest low, as well as high, concentration markets exhibit slower speed of adjustment (or more price rigidity) than the medium group. Thus, the results for the rational distributed lag model estimation provide empirical evidence of a possible non-monotonic relationship between market concentration and price rigidity. This relationship is further examined within the context of a partial adjustment model by estimating the speed of adjustment parameter as a non-linear (quadratic) function of market concentration. The results support the findings derived from the estimation of the rational distributed lag model. These findings have important implications for: (1) future research that attempts to empirically estimate relationships between market structure and price behavior, and (2) antitrust policies that assume reductions in market concentration will always lead to more competitive, presumably less rigid, pricing behavior.