Firm-specific cost savings and market power
AbstractWe 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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Bibliographic InfoArticle provided by Springer in its journal Economic Theory.
Volume (Year): 16 (2000)
Issue (Month): 3 ()
Note: Received: December 7, 1998; revised version: October 25, 1999
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Find related papers by JEL classification:
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
- L4 - Industrial Organization - - Antitrust Issues and Policies
- C9 - Mathematical and Quantitative Methods - - Design of Experiments
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