Review of Industrial Organization
14: 27–50, 1999.
1999 Kluwer Academic Publishers. Printed in the Netherlands.
Durability Versus Concentration as an Explanation
for Price Inﬂexibility
ELIZABETH M. CAUCUTT
Department of Economics, University of Rochester, Rochester, NY 14627–0156, U.S.A.
Business School, The University of Michigan, Ann Arbor, MI 48109, U.S.A.
CHRISTINA M.L. KELTON
Department of Economics, University of Cincinnati, Cincinnati, OH 45221–0371, U.S.A.
Abstract. We document the extent of price rigidity across United States manufacturing industries
in the 1980s and early 1990s and compare rigidity across different phases of the business cycle.
We measure price rigidity in three ways – each under four different sets of assumptions. We take
an approach that relies on disaggregated data; we look at price patterns for over 4000 individual
manufactured commodities. Both durability and seller concentration are found to be important factors
explaining differences in price rigidity across industrial product classes. Using our data, we replicate
the regression results found in Carlton (1986) that were based on actual transaction prices from the
Key words: Price rigidity, market concentration, administered pricing, product durability.
The relationship between market structure and price ﬂexibility has been the topic
of a long, interesting empirical literature for over sixty years. The theory that
administered prices behave differently during the various phases of a business cycle
from prices in the market (or auction) sector of the economy dates from Means
(1935). In particular, Means argued that ﬁrms with some market power would
choose to lower output rather than price during a recessionary period, while ﬁrms
in the market sector would be forced to lower price. Using four-ﬁrm and eight-ﬁrm
concentration ratios to represent market power, Bureau of Labor Statistics producer
pricedata,and a sampleof thirty-sevenfour-digitindustries (obtained afterapplying
four strict selection criteria), Means (1939) found a statistically signiﬁcant positive
relationship between price change and concentration for the period 1929–1932.
We presented an earlier version of this paper at the 1995 Winter Econometric Society Meetings,
in Washington, D.C. We wish to thank Jeffrey Campbell, our discussant there for the paper, as well
as other participants in our session. We also appreciate the computational help given us by Linda
Schneider Stone. Grants from the Minnesota Supercomputer Institute and the University of Minnesota
Graduate School provided partial support for this project.