Price Rigidity and Industrial Concentration: Evidence from the Indonesian Food and Beverages Industry

• Author: Alfons Oude Lansink,Maman Setiawan,Grigorios Emvalomatis
• Date: 01 March 2015
• Published date: 01 March 2015
• DOI: http://doi.org/10.1111/asej.12047

Price Rigidity and Industrial Concentration:

Evidence from the Indonesian Food and

Beverages Industry*

Maman Setiawan, Grigorios Emvalomatis and

Alfons Oude Lansink

Received 6 August 2012; accepted 25 August 2014

This paper investigates the relationship between industrial concentration and price

rigidity in the Indonesian food and beverages industry. A Cournot model of firm

behavior is used in which prices adjust according to a partial adjustment mecha-

nism. The model is applied to panel data of the Indonesian food and beverages

industry over the period 1995–2006. The results suggest that industrial concentra-

tion has a positive effect on percentage price changes. Furthermore, the speed of

price adjustment is higher when the per unit cost of production rises.

Keywords: food and beverages industry, industrial concentration, oligopoly struc-

ture, price rigidity, speed of price adjustment.

JEL classification codes: L11, L16, L13, L22.

doi: 10.1111/asej.12047

I. Introduction

Price rigidity is defined as the condition where some prices adjust slowly in

response to changes in per unit cost of production or changes in supply or

demand.1Means (1935) uses the term ‘administered price’ for a price that does

not change frequently in the oligopoly structure because of market power. Price

rigidity is among the most important economic issues for economic policy-

makers as it can cause inefficiency in the allocation of resources (Carlton, 1986).

An important factor influencing price rigidity is the degree of industrial concen-

tration (see Stigler, 1947; Carlton, 1986; Bedrossian and Moschos, 1988; Caucutt

et al., 1999). A few large firms operating in an industry characterized by high

industrial concentration may use market power to control the price level as well

as variations in the price level.

* Setiawan (corresponding author): Faculty of Economics and Business, University of

Padjadjaran, Jl. Dipati Ukur No. 35 Bandung 40132, Jawa Barat-Indonesia. Email: maman.setiawan

@fe.unpad.ac.id. Emvalomatis: Economic Studies, University of Dundee, Dundee, DD1 4HN, UK.

Oude Lansink: Business Economic Group, Wageningen University, Hollandseweg 1 6706 KN

Wageningen, the Netherlands. We acknowledge financial support from the Directorate General of

Higher Education, Republic of Indonesia.

1 The concept of the kinked demand curve was introduced by Sweezy (1939), who also defined price

rigidity as slow price adjustment with respect to the other competitors’ strategy.

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Asian Economic Journal 2015, Vol. 29 No. 1, 61–72 61

© 2015 The Authors

Asian Economic Journal © 2015 East Asian Economic Association and Wiley Publishing Pty Ltd