Price Adjustment and Market Structure

Winters' comment essentially concerns the econometric methods used to estimate the adjustment-concentration relationship. In this reply it will be shown that the suggested estimation methods do not alter our earlier conclusions. Some new econometric estimates indicate that the original findings should stand without major qualification and consequently Winters' criticisms of our methodology are unjustified. But first the broader question regarding the alleged link between concentration and inflation is examined. Anyone who reads the paper carefully cannot fail to realise that it is not about inflation. What it does is to estimate the relationship between the speed of price adjustment and concentration as a test of the 'administered prices' hypothesis.2 To suggest that the findings could have implications for inflation is entirely different from saying that they explain inflation. These implications are twofold. First, bigger As associated with greater concentration lead to higher shortrun peaks in the rate of inflation following a shock which, given the evidence on thresholds in the formation of inflationary expectations, could have a significant influence on wage-price dynamics.3 Second, constraints on the rate at which cost increases can be passed on could lead firms to absorb or resist these changes, a factor stressed by the Monopolies Commission (1973, p. 30) to which reference was made in the article

Economics · Economic theories and models · Economic Theory and Policy · Merger and Competition Analysis

• Regressions from Samples Having Different Characteristics

  Gary R Saxonhouse•The Review of Economics and…•1977

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• Price Adjustment and Market Structure

  Simon Domberger•The Economic Journal•1979

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