MARKET-STRUCTURE AND THE SPEED OF PRICE ADJUSTMENTS - EVIDENCE OF NON-MONOTONICITY

Rational distributed lag and partial adjustment models are used in thi s paper to analyze the speed of adjustment of consumer deposit rates. Dummy variables conditioned on market concentration are added to the r ational distributed lag model to test for speed of adjustment differen ces across high, medium, and low concentration markets. The estimated model parameters suggest low, as well as high, concentration markets e xhibit slower speed of adjustment (or more price rigidity) than the me dium group. Thus, the results for the rational distributed lag model e stimation provide empirical evidence of a possible non-monotonic relat ionship between market concentration and price rigidity. This relation ship is further examined within the context of a partial adjustment mo del by estimating the speed of adjustment parameter as a non-linear (q uadratic) function of market concentration. The results support the fi ndings derived from the estimation of the rational distributed lag mod el. These findings have important implications for: (1) future researc h that attempts to empirically estimate relationships between market s tructure and price behavior, and (2) antitrust policies that assume re ductions in market concentration will always lead to more competitive, presumably less rigid, pricing behavior.