Thick markets, market competition and pricing dynamics: evidence from retailers

By using store‐level transaction price data for books in Ann Arbor, Michigan, and music CDs in Natick, Massachusetts, the implications of thick markets and the intensity of market competition on price markups and the synchronization in price adjustments are empirically tested. The data indicate that for books, actual price markups are 6% lower than the suggested price markups, while for music CDs, they are 3.6% lower. Popular items are more heavily discounted than less popular ones. The data show that a 10% increase in national sales of a given book title results in a 0.06% drop in price markups. Also, market competition has a non‐linear depressing effect on price markups that becomes stronger for widely known popular items. Finally, a 10% increase in the number of sellers in the market lead to a 5.8% increase in the likelihood of a price adjustment and a 2.2% increase in the share of sellers that synchronize their price adjustments.