Review of Industrial Organization 12: 37–57, 1997.
1997 Kluwer Academic Publishers. Printed in the Netherlands.
Market Structure and the Speed of Price
Adjustments: Evidence Of Non-Monotonicity
WILLIAM E. JACKSON III
University of North Carolina, Chapel Hill, NC 27599, U.S.A.
Abstract. Rational distributed lag and partial adjustment models are used in this paper to analyze the
speed of adjustment of consumerdeposit rates. Dummy variables conditioned on marketconcentration
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,
Key words: Price rigidity; market structure; non-monotonic relationship; consumer deposits.
JEL Classiﬁcation Numbers: L11, L21
The pricing behavior of ﬁrms is the central theme in most economic analysis of
market performance. Indeed, as Carlton (1989) points out, economists (almost)
overzealously focus on price as the main mechanism for the efﬁcient allocation
of resources. This may be because it is well recognized that inefﬁcient resource
allocationcould occurif pricesarenot freetoadjust tochanges inmarket conditions.
Macroeconomics, for example, relies on some source of price (or wage) rigidity
to generate inefﬁcient unemployment results in labor markets. Additionally, the
industrial organization literature has developed a large and growing subﬁeld on
“administered” prices, that is, prices which do not necessarily respond in the usual
textbook fashion to changes in supply and demand conditions.
I thank Robert Eisenbeis, Steven Sharpe, and Paula Worthington for helpful comments. Also,
I gratefully acknowledge the National Science Foundation for providing ﬁnancial support of this
research through Grant SBR-9410626. Of course, all errors and omissions remain the sole responsi-
bility of the Author.