goods when they know prices will go up.<sup>2</sup> In sum, higher price volatility indicates that a market will have to assume costs to overcome it. For that reason, higher volatility is assumed to be less efficient than lower volatility.

As already explained, the functioning of markets in this study refers to the comparison of the behavior of prices based on the following three dimensions: dispersion, volatility and passthrough. The study follows on and is informed by a pilot study in Nigeria. The results of that pilot study showed the following:

- Substantial heterogeneity in the dispersion, volatility and pass-through of markets across time and location for well-specified, homogenous commodities;<sup>3</sup> and

- This heterogeneity was robust across time and displayed distinct geographical and commodity-linked patterns.<sup>4</sup>

The results of the Nigeria study were preliminary and not published because the price data were of substantially poorer quality than price data available from Mexico. That said, we find similar results for Mexico.

In addition to identifying and understanding how well markets function across Mexico, we use these same indicators of market efficiency to determine how markets respond to changes in market structure and competition policies. Following Iacovone et al. (2011), this study expands on identifying the economic effects of a large retailer’s entry into Mexico. More specifically, instead of looking at the entry’s effect on manufacturing, this study examines the effect of entry on the performance of markets in locations near and far from the physical location of new stores. For the US, Fishman (2006) provides insight on the effects of WalMart on local markets. Driven mostly by constant reductions in transportation and production costs, Wal-Mart usually offers goods at lower prices than their competitors, in turn forcing the rest of retailers to drop their prices. Atkin et al. (2015) find similar results in prices for Mexico. Indeed, this study finds that a large retailer’s entry improves the functioning of markets as we have defined them. All things being equal, markets more immediately and directly affected from the entry of this large retailer function more efficiently after entry than those less affected.

Also, this research exploits the existing information on competition in Mexico to analyze the effects of anticompetitive practices on the functioning of markets. Using the documents published by the Mexican competition agency, COFECE, on investigations, opinions and resolutions regarding the existence of anticompetitive activities in industries and regions across time, a database is assembled to identify markets with distortions in competition and use these data as a control when evaluating the functioning of markets. It is shown that markets where anticompetitive practices are present behave less efficiently when no regulator acts to correct such inefficiencies.

The next section contains a literature review on the indicators of market efficiency used. The empirical strategy proposed to estimate the dimensions of efficiency of markets is discussed

> 2 The assumption is that the price falls below cost since price was set competitively—at zero economic profit.

> 3 White and yellow maize, local and imported rice, sorghum, cement and bottled water.

> 4 After controlling for physical isolation, proximity to international borders, economic density, competition, proximity to production of the commodity in question and broad measures of poverty.

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