Market concentration and the dynamics of prices and mark-ups

Abstract

The dynamic response of prices and mark-ups to economic shocks play a crucial role in macroeconomics. We explore the role that market concentration plays in determining the responsiveness to different shocks. Using a model of oligopolistic competition we show that the sensitivity of prices and mark-ups depend on the type of shocks and the degree of implicit collusion formed in a market. We test these predictions in laboratory price setting games and find that in smaller markets collusive behavior is formed more readily and this has an important impact on the response of prices and mark-ups to the different shocks, consistent with our theoretical predictions. We compare various features of price setting behavior in our lab experiments to those found in retail data.