Cost-Price Relationships in a Concentrated Economy

We use local projections with granular instrumental variables to estimate the pass-through of costs into prices and how it is affected by industry concentration. On average, we find that prices increase above trend growth for three quarters after an exogenous cost shock, accompanied by a decline in output, with an estimated pass-through of 0.7. The price response to shocks becomes about 27 percent greater when there is an increase in concentration similar to the one observed since the beginning of this century. However, this differential effect depending on concentration is entirely driven by a higher pass-through of positive cost shocks. Consistent with market power, margins decrease less in more concentrated industries after cost increases. Within industry, margins of industry leaders are not squeezed in response to positive cost shocks, unlike those of followers, while negative shocks increase margins for all firms. Our findings shed light on the post-COVID inflationary pressures and the linkages between inflation dynamics and rising market concentration.