Monday, August 1, 2022
In this note, we provide a cleanly identified and empirically relevant example of a setting where an increase in market concentration caused lower prices and markups. This result contradicts some widely used models of competition and highlights the value of richer models of firm behavior and competition in the debate over concentration and market power. Our setting is the Washington retail cannabis industry, which features exogenous variation in market concentration that resulted from retail licenses being awarded via lotteries. The data allow us to compute markups directly by observing wholesale prices. We find a negative causal relationship between markups and concentration, where exogenously more concentrated markets have significantly lower markups and prices.