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Firm-specific cost savings and market power

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Author Info

  • 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)

Abstract

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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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 16 (2000)
Issue (Month): 3 ()
Pages: 545-565

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Handle: RePEc:spr:joecth:v:16:y:2000:i:3:p:545-565

Note: Received: December 7, 1998; revised version: October 25, 1999
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Related research

Keywords: Market power; Cost savings; Efficiencies and antitrust analysis; Pass-through rate.;

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Cited by:
  1. Douglas Davis & Bart Wilson, 2006. "Equilibrium Price Dispersion, Mergers and Synergies: An Experimental Investigation of Differentiated Product Competition," International Journal of the Economics of Business, Taylor and Francis Journals, vol. 13(2), pages 169-194.
  2. Brandts, Jordi & Cabrales, Antonio & Charness, Gary, . "Forward induction and entry deterrence: an experiment," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/3996, Universidad Carlos III de Madrid.
  3. Davis, Douglas D. & Wilson, Bart J., 2005. "Differentiated product competition and the Antitrust Logit Model: an experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 57(1), pages 89-113, May.
  4. Douglas D. Davis & Bart J. Wilson, 2006. "Strategic Buyers, Horizontal Mergers and Synergies: An Experimental Investigation," Working Papers 0601, VCU School of Business, Department of Economics.

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