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A common intuition is that firms with market power have an incentive to absorb part of a cost increase whereas, under perfect competition, price equals marginal cost ( $P=MC$ ) so the rate of pass-through of a market-wide (exogenous) increase in marginal cost ( $\partial P/\partial MC$ ) is 1.
‘Cost pass-through’ describes what happens when a business changes the price of the products or services it sells following a change in the cost of producing them. An understanding of...
- CEEPR WP 2015-009
- June 2015
- 5 Concluding remarks & policy implications
A Joint Center of the Department of Economics, MIT Energy Initiative and MIT Sloan School of Management.
Abstract In response to cost changes, prices often rise more strongly or quickly than they fall. This phenomenon has attracted attention from economists, policymakers, and the general public for decades. Many assert that it cannot be explained by standard economic theory, and is evidence for anti-competitive behaviour by rms. This paper argues agai...
This paper has argued that asymmetric pass-through can be explained, in principle, even by simple price theory. This includes the phenomena of price rising more strongly, and more weakly, than they fall, and does not rely on imperfect competition. Put sharply, the widespread claim that simple economics cannot explain asymmetric pass-through is fals...
absorb part of a cost increase whereas, under perfect competition, price equals marginal cost (P= MC) so the rate of pass-through of a market-wide (exogenous) increase in marginal cost (@P=@MC) is 1. This suggests that more intense competition leads to stronger pass-through.
Conclusion. Understanding the pro t impact of regulation is important for regulated rms, policymakers and investors. We introduce a new, simple, exible theoretical framework allowing large-scale estimation based on pass-through as a su. cient statistic.
Feb 1, 2014 · Consider the classical double marginalization problem of single-product successive monopolies. We show that the ratio of the cost pass-through at the final sale relative to that at the wholesale level is characterized by the curvature of inverse demand in the final market.
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What is marginal pass-through?
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What is the relationship between cost pass through and demand pass-through?
Why is the pass-through rate unique?
marginal cost. Parameter #denotes cost-shifters, such as transportation costs or bilateral exchange rates. We assume monopolistic competition and segmented good markets, which means that the rm chooses price pin order to maximize ˇ(c;Q;P) = max p f(p c)q(p;P;Q)g (3) taking demand and (market-speci c) aggregate variables Qand Pas given.
