Price-concentration Relationship Research Articles

Unraveling the price-concentration relationship: The Role of national distribution centers in Chilean supermarket industry consolidation

We examine the relationship between prices, costs, concentration, and the intensity of competition in the Chilean supermarket industry during its consolidation process in the late 1990s. This process was characterized by increased concentration, lower prices paid by consumers, and higher levels of competition between firms. We argue that behind this phenomenon lies the adoption of National Distribution Centers by supermarket chains, which represented a technological cost-saving change that intensified competition and reduced profit margins. We develop a simple theoretical model that allows for cost heterogeneity across firm types and provides testable empirical implications regarding the underlying price-concentration relationship. Our results are consistent with a higher degree of price competition in food retailing and can explain the structure of this industry 20 years after the start of its consolidation process.

Searching for the Concentration-Price Effect in the German Movie Theater Industry

This paper investigates whether a price-concentration relationship can be found on local cinema markets in Germany. First, we test a model of monopolistic pricing using a new set of German micro data and find no significant difference in admission prices on monopoly and oligopoly markets. In a next step, we test whether this can be explained by the existence of local monopolies, but find no hint of that. Implicit or explicit collusion among cinema operators might explain our observations.

Searching for the Concentration-Price Effect in the German Movie Theater Industry

Summary The empirical relationship between market concentration and prices has been well established for a long time and for numerous industries. Recently it was confirmed for the US movie theater industry. This paper investigates, whether such a price-concentration relationship can be found on local cinema markets in Germany as well, focusing on up-to-date mainstream movies. First, we develop a model of monopolistic pricing and estimate its parameters using data of monopoly markets from a new set of German micro data. Then we apply the estimated model to simulate monopoly prices on local markets with two or more operators and compare them to the prices actually observed in these markets. We find no significant difference in admission prices, which puts our study in contrast to the results found on local US markets. Searching for an explanation, we test whether movie theater operators even though being located in the same geographic area, are local monopolists, but find no hint of that, either.

Spatial Competition, Network Externalities, and Market Structure: An Application to Commercial Banking

I develop a model of spatial competition between multi-branch firms in which consumers value the price of services, spatial proximity to their home branch, and the number of other branches in the firm's network. The model delivers within and across market predictions on the pattern and density of branching, the relationship of concentration to market size, the price-concentration relationship, and price dispersion. I consider the applicability of this model to the commercial banking market for retail deposits. I test the model's predictions by utilizing variation in the timing and extent of within-state branching restrictions on banks and bank holding companies and fi nd results broadly consistent with the model. These restrictions constitute a plausible natural experiment with which to identify the role of spatial externalities on the equilibrium deposit-market structure of commercial banks. I also identify and parsimoniously model difficult-to-resolve conceptual issues in separating loan-side and deposit-side factors in the determination of bank market structure.

Does Concentration Matter? Measurement of Petroleum Merger Price Effects

We have estimated the price effects of two changes in market structure resulting from two changes in the ownership of gasoline refineries in the San Francisco Bay area: Tosco's purchase of Unocal's Rodeo refinery in April 1997 and UDS's purchase of Tosco's Avon refinery in August 2000. These events provide a relatively unique opportunity to test a price concentration relationship. If market concentration is related to price, then we should observe prices increase and then decrease by a similar amount following these transactions. We do not find evidence of a consistent price concentration relationship.

Banking concentration and the price-concentration relationship: the case of Brazil

In this paper, we present a new measure of concentration that employs duality theory and a study on the evolution of banking concentration in the Brazilian banking system. We present evidence suggesting that this new measure of concentration is more informative than the usual Hirschman-Herfindahl Index (HHI), which is commonly employed in concentration studies. Finally, we study the relation between the banking structure (level of concentration) and price using a panel data model, macroeconomic and risk variables being controlled. There is no evidence that banking concentration leads to uncompetitive practices.

Is the impact of managed care on hospital prices decreasing?

Prior studies find that the growth of managed care through the early 1990s introduced a strong positive relationship between price and concentration in hospital markets. We hypothesize that the relaxation of constraints on consumer choice in response to a “managed care backlash” has diminished the price sensitivity of demand facing hospitals, reducing or possibly reversing the price–concentration relationship. We test this hypothesis by studying the price/concentration relationship for hospitals in California and Florida for selected years between 1990 and 2003, while addressing the potential endogeneity of concentration. We find an increasingly positive price/concentration in the 1990s with a peak occurring by 2001. Between 2001 and 2003, the growth in this relationship halts and possibly reverses.

A note on the “risk-adjusted” price–concentration relationship in banking

Price–concentration studies in banking typically find a significant and negative relationship between consumer deposit rates (i.e., prices) and market concentration. This implies highly concentrated banking markets are “bad” for depositors. It also provides support for the Structure-Conduct-Performance hypothesis and rejects the Efficient-Structure hypothesis. However, these studies have focused almost exclusively on supply-side control variables and neglected demand-side variables when estimating the reduced form price–concentration relationship. For example, previous studies have not included in their analysis bank-specific risk variables as measures of cross-sectional derived deposit demand. We find that when bank-specific risk variables are included in the analysis the magnitude of the relationship between deposit rates and market concentration decreases by over 50%. We offer an explanation for these results based on the correlation between a bank’s risk profile and the structure of the market in which it operates. These results suggest that it may be necessary to reconsider the well-established assumption that higher market concentration necessarily leads to anticompetitive deposit pricing behavior by commercial banks. This has direct implications for the antitrust evaluations of bank merger and acquisition proposals by regulatory agencies. And, in a more general sense, these results suggest that any Structure-Conduct-Performance based study that does not explicitly consider the possibility of very different risk profiles of the firms analyzed may indeed miss a very important set of explanatory variables. And, thus, the results from those studies may be spurious.

The 'Risk-Adjusted' Price-Concentration Relationship in Banking

Price-concentration studies in banking typically find a significant and negative relationship between consumer deposit rates (i.e., prices) and market concentration. This relationship implies that highly concentrated banking markets are bad for depositors. It also provides support for the Structure-Conduct-Performance hypothesis and rejects the Efficient-Structure hypothesis. However, these studies have focused almost exclusively on supply-side control variables and have neglected demand-side variables when estimating the reduced form price-concentration relationship. For example, previous studies have not included in their analysis bank-specific risk variables as measures of cross-sectional derived deposit demand. The authors find that when bank-specific risk variables are included in the analysis the magnitude of the relationship between deposit rates and market concentration decreases by over 50 percent. They offer an explanation for these results based on the correlation between a bank's risk profile and the structure of the market in which it operates. These results suggest that it may be necessary to reconsider the well-established assumption that higher market concentration necessarily leads to anticompetitive deposit pricing behavior by commercial banks. This finding has direct implications for the antitrust evaluations of bank merger and acquisition proposals by regulatory agencies. And, in a more general sense, these results suggest that any Structure-Conduct-Performance-based study that does not explicitly consider the possibility of very different risk profiles of the firms analyzed may indeed miss a very important set of explanatory variables. And, thus, the results from those studies may be spurious.

Price-Concentration Studies: There You Go Again

Price-concentration studies are important because they are widely seen as supporting the standard prediction that high seller concentration tends to harm consumers and because both antitrust agencies use them in assessing horizontal mergers. But price-concentration studies are severely flawed. In industries in which sellers compete on quality and amenities, a positive price-concentration relation could result, not from coordinated effects, but from competitive superiority. Since such non-price competition is ubiquitous and is usually intense, this poses a significant problem of interpretation. Further, non-price competition cannot be controlled for statistically, as is frequently assumed. Even if sellers compete exclusively on price, price-concentration studies are still severely flawed. Differences in market size could induce a positive price-concentration relationship, but as with competitive superiority, a price-concentration relationship resulting from this cause does not imply consumers are being harmed. Market size differences may well account for the observations that the FTC attributed to non-competitive behavior in Staples. The paper concludes with some suggestions for improving price-concentration studies and for further research.

The price‐concentration relationship in grocery retailing: Retesting Newmark

AbstractA study by Newmark is one of two price‐concentration studies of U.S. grocery retailing that has failed to find a positive relationship. We examined four possible sources of experimental error in this study. The most important source of error was the failure to exclude noncompeting grocery retailers in the construction of the concentration measure. The relationship was also sensitive to controlling for a subgroup of observations from one state, to alternative data sources, and functional form. When these changes were made, concentration was found to be positively associated with the cost of groceries across cities. The relationship was significant despite a small nonrandom sample of cities and unscientifically sampled prices. [Econ Lit citations: L130, L810, L100] © 2002 Wiley Periodicals, Inc.

The Price-Concentration Relationship in Banking: A Reply

Berger, Allen N., and Timothy H. Hannon, The Price-Concentration Relationship in Banking, this REVIEW 71 (May 1989), 291-299. Demsetz, Harold, Industry Structure, Rivalry, and Public Policy, Journal of Law and Economics 16 (Apr. 1973), 1-9. Jackson, William E. III, Market Structure and Price Adjustments: Evidence from the Banking Industry, unpublished Ph.D. dissertation, University of Chicago, June 1989. Peltzman, Samuel, The Gains and Losses from Industrial Concentration, Journal of Law and Economics 20 (Oct. 1977), 229-263. Salinger, Michael, The Concentration-Margins Relationship Reconsidered, in Brookings Papers on Economic Activity: Microeconomics, Martin N. Bailey and Clifford Winston, (eds.), Brookings (Washington, D.C.: Brookings Institution, 1990). 5 No formal statistical tests of the differences in the estimated coefficients of CONC across subsamples were conducted. This analysis was concerned more with the sign and significance level of each subsample estimated CONC coefficient.

The Price-Concentration Relationship in Banking: A Comment

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A new test of the price-concentration relationship in grocery retailing

Using a new data set and including income in the specification, this paper finds that retail grocery prices are not significantly related to market concentration.

The Price-Concentration Relationship in Banking

The commonly observed positive correlation between market concentration and profitability may be explained by noncompetitive pricing behavior, as argued by the structure-performance hypothesis, or by the greater efficiency of firms with dominant market shares, as argued by the efficient-structure hypothesis. By examining the price-concentration relationship instead of the profit-concentration relationship, this paper tests the structure-performance hypothesis in a manner that excludes the efficient-structure hypothesis as an alternative explanation of the results. The results strongly support the structure-performance hypothesis and are robust with respect to model specification, measurement of concentration, and econometric technique. Copyright 1989 by MIT Press.