Recent inflation in Korea seems to feature a stagflation which cannot be fully explained in terms of demand-pull theory. The main purpose of this study is to investigate the influences of industrial concentration on this phenomenon. It is generally believed that oligopolistic firms in concentrated industries practice full-cost pricing and increase their prices relative to other competitive industries through their market power.
In this respect, regression and table analyses are implemented to test the Administered-Prices Hypothesis using data from 104 Korean manufacturing industries in the 1970's.
The main result is that the Administered-Prices Hypothesis is weakly supported, and this limited support might be partially due to government regulation of oligopolistic prices in the 1970's and to some defects in data collection. But it appears that in the deep recession of 1970-80, the downward rigidity of prices was prevalent, and concentrated industries showed larger price increases than unconcentrated industries.
It is also found that industrial prices were largely insensitive to changes in demand or the business cycle, but were mainly influenced by cost factors, and in this process industrial concentration contributed significantly to stagflation.
Consequently, we can conclude that anti-trust policies and other related pro-competition policies are required for the macroeconomic stability or economic growth without inflation as well as the improvement of economic efficiency.