Concentration, Retail Markups, and Countervailing Buyer Power: Evidence from Retail Lotteries

Abstract

In this note, we investigate the causal link between market concentration and markups in a retail setting. We study the Washington retail cannabis industry, which features exogenous variation in market concentration that resulted from retail licenses being awarded via lotteries. We observe wholesale prices and can therefore directly compute transaction-level markups. We find a negative causal relationship between markups and concentration in this setting, where more concentrated markets have significantly lower markups, retail prices, and wholesale prices. The negative effect of concentration on prices provides direct evidence of countervailing buyer power by retailers. These results highlight the value of using industry specific data and rich models of competition to advance the debate on concentration and markups.

Keywords: markups, market concentration, retail, countervailing buyer power, cannabis policy

JEL Classification: L11, L22, L81