Prices Can Be Lower When Few Firms in Industry
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.
