Douglas D. Davis () (Department of Economics, Virginia Commonwealth University, Richmond, VA 23284-4000, USA) Bart J. Wilson () (Economic Science Laboratory, University of Arizona, McClelland Hall Room 116,P.O. Box 210108, Tucson, AZ 85721-0108, USA)
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We report a policy experiment that illustrates a potential problem of using historical pass-through rates as a means of predicting the competitive consequences of projected firm-specific cost savings in antitrust contexts, particularly in merger analysis. The effects of cost savings on welfare can vary vastly, depending on how the savings affect the industry supply schedule. In a capacity-constrained price-setting oligopoly, we observe that cost savings can overwhelm behaviorally salient market power incentives when the savings affect marginal (high cost) units. However, cost savings of the same magnitude on an infra-marginal unit leave market power unchanged.
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Article provided by Springer in its journal Economic Theory.