Abstract
The U.S. has recently experienced a prolonged period with high growth, low and falling unemployment, and low inflation. One popular view is that “competitive pressures” have kept inflation down in the U.S., as well as in other developed countries. In this survey we discuss the empirical evidence of the relation between inflation and the intensity of competition.
First, we examine the evidence on whether the intensity of competition affects the speed of price adjustment. We argue that the many studies proxying the intensity of competition by some measure of industry concentration face serious methodological problems. When we also consider the studies measuring the intensity of competition more precisely, the bulk of the
evidence supports that less competitive markets are slower to adjust prices. Second, we examine two prime candidates to a general increase in the intensity of competition that may have had a temporary downward pressure on prices; deregulation of markets and international trade. For the many previously regulated markets (c.f. airlines, telecommunications, electricity) we argue that the nature of deregulation was so heterogenous that it may be misleading to draw any conclusion about the impact on price levels. Trade liberalization, on the other hand, has been shown to intensify competition but the magnitude of the effects are unknown. Finally, evidence is in favor of the notion that competition exerts a downward pressure on costs and thereby indirectly on prices.