Prices Can Be Lower When Few Firms in Industry

TabarrokAlex.jpg   Alex Tabarrok.  Source of image:  http://www.gmu.edu/centers/publicchoice/faculty.html

 

Price gouging can work only if firms have monopoly power — so if gouging is the explanation for higher premiums, we would expect to see higher premiums in states with less competition. My student, Amanda Agan, and I tested this hypothesis in a study released two days ago by the Manhattan Institute. Contrary to the gouging hypothesis, we found that a 10% increase in industry concentration reduces premiums by $2,200. The result makes sense if we remember that, to increase market share, firms don’t raise prices but rather lower them. Wal-Mart has grown into the nation’s dominant retailer by lowering prices, not raising them.

 

For the full commentary, see: 

ALEX TABARROK. "Rule of Law; Price Gouging Is Bad Medicine." The Wall Street Journal (Sat., May 20, 2006):  A9.

 

Leave a Reply

Your email address will not be published.