The relationship between market structure and CPI: a study of the food and beverage, housing and transport industries in Lebanon

Abstract

Purpose - With inflation being the main concern of all economies, many theories have been developed to try to find its determinants. Different studies have been conducted in an attempt to understand the behavior of prices and the link between competition and prices; however, none have been conducted in Lebanon. Consequently, this paper studied the market structure of the leading Lebanese Industries for the period extending between 2002 and 2016. In addition, aiming to understand the behavior of prices, this paper studied the existence and type of the relationship between market structure and prices, by controlling for several variables such as market size, currency in circulation and the unemployment rate. Design/methodology/approach - This paper conducts two separate approaches to understand the relationship between market structure and prices at the industry level and the overall level. First, the Pearson correlation test is conducted to detect possible linear relationships between market concentration and industry specific CPT first, and then, overall CPI. Second, where linear relationships exist, the multiple linear regression approach is used to detect the existence of causal relationships between the changes in market concentrations and the changes in CPIs. Findings - The relationship between market concentration and prices is linear and not causal. Research limitations - Due to the lack of available sources of data in Lebanon, the period understudy was short and restricted to the VAT department in the ministry of Finance. In addition, there was no available public micro and macroeconomic data, which also affected the results of the paper and prohibited the usage of several potential control variables. Practical implications - The importance of a better competition law to organize the Lebanese markets and the need to increase the size of the existing firms are confirmed in this paper. Originality/value - This paper is the first to study the relationship between competition and prices in Lebanon, and the first to evaluate the market structure in the Lebanese markets since 2003.