Common trends, cointegration and competitive price behaviour

Abstract

This article describes a characterisation of competitive market behaviour using the concepts of cointegration analysis. It requires all (n) rms to set prices to follow a single stochastic trend (equivalently the vector of n prices should have cointegrating rank n - 1). This implies that, in the long run, prices are driven by the shocks that impact on all companies, ruling out the possibility that the price set by any one rm is weakly exogenous.