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The Relationship between Competition and Inflation

Author

Listed:
  • Jürgen Janger

    (Austrian Institute of Economic Research)

  • Philipp Schmidt-Dengler

    (The London School of Economics and Political Science)

Abstract

This study supplements previous empirical work on the relationship between the average rate of inflation and competition by adding a new approach for estimating markups and investigating the annual rate of inflation, price variance and price levels. Subject to certain qualifications, markups can be interpreted as indicators for competition intensity. Our calculation, conducted for 15 countries and 34 sectors, exhibits major differences between the sectors within one country and among the same sectors across various countries. The markups are used to produce estimates of the relationship between competition and inflation (average and annual rates), price levels and price variance. Although a significantly negative correlation with inflation and price variance is evident for the period from 1991 to 2005, competition loses its explanatory power for inflation rates when longer time spans are considered. In terms of economic policy, this study confirms the findings of previous works which identify the intensification of competition as a temporary means of curbing price increases. A new finding from this study is the evidence for the inflation-stabilizing effect of intensified competition, which is caused by its negative correlation with price variance. The fact that no significant relation between price level and competition intensity was found may be attributable to insufficient data.

Suggested Citation

  • Jürgen Janger & Philipp Schmidt-Dengler, 2010. "The Relationship between Competition and Inflation," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 53-65.
    • Handle: RePEc:onb:oenbmp:y:2010:i:1:b:3
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    File URL: https://www.oenb.at/dam/jcr:e3a4c575-2758-4b2a-90a5-85fcf539fc94/mop_2010_q1_analyses_03_tcm16-190403.pdf
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    Citations

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    Cited by:

    1. Christian Reiner & Christian Bellak, 2023. "Hat die ökonomische Macht von Unternehmen in Österreich zugenommen? Teil 2," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 49(2), pages 17-76.
    2. Klaus S. Friesenbichler & Agnes Kuegler & Andreas Reinstaller, 2021. "Does value chain integration dampen producer price developments? Evidence from the European Union," The World Economy, Wiley Blackwell, vol. 44(1), pages 89-106, January.
    3. Comisión Nacional de los Mercados y la Competencia (CNMC), 2023. "Guide. Competition against inflation: How competition and efficient regulation help protect the purchasing power of consumers," Colección Estudios de Mercado G-2022-02_ENG, Comisión Nacional de los Mercados y la Competencia (CNMC).
    4. Jürgen Janger & Julia Bock-Schappelwein & Thomas Horvath & Ina Meyer, 2013. "Monitoring Austria's Efforts Within the Europe 2020 Strategy," WIFO Studies, WIFO, number 46950, April.
    5. Heinrichs, Katrin & Wagner, Helmut, 2019. "Positive trend inflation and the Phillips curve – A tale of two slopes and various impulse responses," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 283-307.
    6. J. Jonckheere & H. Zimmer, 2017. "Services inflation : The Belgian exception," Economic Review, National Bank of Belgium, issue i, pages 93-109, June.

    More about this item

    Keywords

    competition; inflation; markup;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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