Concentration, Relative Price Flexibility and “Administered Prices”: Some Canadian Experience

• Author: J. C. H. Jones,L. Laudadio
• Published date: 01 December 1977
• Date: 01 December 1977
• DOI: http://doi.org/10.1177/0003603X7702200403
• Subject Matter: Article

CONCENTRATION.

RELATIVE

PRICE FLEXIBILITY AN,D

"ADMINISTERED PRICES": SOME

CANADIAN

EXPERIENCE

by

J.

C. H.

JONES

and

L.

LAUDADIO·

One of the most durable controversies in economics re-

volves around the administered prices/administered inflation/

inflexible prices, thesis. Critics of the thesis have scored it

on the grounds

that

it is theoretically inadequate,'

its

em-

pirical foundations

are

at

best "whimsical" and "homely," 2

and have ritualistically killed it off

at

regular

intervals."

But

the

thesis-in

one or other of

its

many

forms-refuses

to die.

Its

most vociferous critic complains

that

it

has more lives

than aeat,' although

its

supporters

prefer

the "phoenix"

rising" analogy. The longevity of the thesis is due to three

interrelated

factors:

aconfusion over

what

the thesis means

and consequently afailure to test the correct hypothesis ;"

the continned growth of the thesis to encompass every type

of price behavior other

than

that

postulated by classical per-

fect competition,' which makes it difficult to devise

any

sort

of statistical

test;

and the tendency of critics to indulge in

empirical overkill which has resulted only in exposing their

own

data

inadequacies and so paradoxically to

support

the

thesis."

The object of this

paper

is to investigate one of the many

versions of the

thesis-the

relationship between

industry

con-

centration and relative price

flexibility-in

the Canadian con-

text. The conclusion is

that

the evidence is generally com-

patible with the version of the "administered" price thesis

employed in this analysis.

•Department of Economics, University of Victoria, B.C., Canada.

775

776

THE

ANTITRUST

BULLETIN

The

paper

is organized into three

parts:

I, the construc-

tion of a testable hypothesis and an outline of the model;

II,

the empirical test of the hypothesis; and

III,

a conclusion

on the implications of the results

for

economic analysis.

I.

THE

HYPOTHESIS

AND

THE

MODEL

(i)

The Hypothesis

Since Means coined the term "administered prices" in

1935, the chief characteristic of the ensuing three-decade de-

bate (aside from

its

acrimony) has been confusion. Adelman

has noted

that

administered pricing means different things to

different people" and this is quite

apparent

from the number

of times

that

the same statistical results have been claimed

as simultaneously supporting and contradicting the thesis."

However,

rather

than trying to

sort

out the many contradic-

tory

statements of the thesis," in this

paper

we will confine

ourselves to examining the relationship between concentra-

tion and relative price flexibility which we feel is compatible

with the latest statements of the thesis."

It

should be clear

therefore that,

for

the purpose of the analysis carried out

in this paper, we employ the term "administered" price as

the equivalent of relatively inflexible price, and that, wherever

we

refer

to the administered price thesis, we

are

in fact re-

ferring to the hypothesis

that

the prices of goods produced

by the more concentrated industries

are

relatively inflexible

compared to prices of less concentrated industries.

In

our view, the core of the administered prices thesis is

merely

that

the prices of goods produced by firms possessing

market power

are

less flexible

than

the prices of goods pro-

duced by firms which have no market power. More specifi-

cally, in a deflationary situation when prices

are

generally

falling, competitively determined prices

are

falling

but

"ad-

ministered" prices may either remain the same, fall less than

competitive prices, or even rise," Symmetrically, when prices

are

generally rising, competitive prices rise,

but

"adminis-