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Does competition increase pass-through?

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  • Ritz, R.

Abstract

How does market power affect the rate of pass-through from marginal cost to the market price? A standard intuition is that more competition makes prices more “cost-reflective” and thus raises cost pass-through. This paper shows that this intuition is sensitive to the common assumption in the literature that firms’ marginal costs are constant. If firms have even modestly increasing marginal costs, more intense competition actually reduces pass through. These results apply to the “normal” case where pass-through is less than 100%. They have implications for competition policy and environmental regulation.

Suggested Citation

  • Ritz, R., 2019. "Does competition increase pass-through?," Cambridge Working Papers in Economics 1974, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:1974
    Note: rar36
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    References listed on IDEAS

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    1. Anderson, Simon P. & Renault, Regis, 2003. "Efficiency and surplus bounds in Cournot competition," Journal of Economic Theory, Elsevier, vol. 113(2), pages 253-264, December.
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    6. E. Glen Weyl & Michal Fabinger, 2013. "Pass-Through as an Economic Tool: Principles of Incidence under Imperfect Competition," Journal of Political Economy, University of Chicago Press, vol. 121(3), pages 528-583.
    7. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
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    Cited by:

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    2. Bustos, Emil, 2023. "The Effect of Centrally Bargained Wages on Firm Growth," Working Paper Series 1456, Research Institute of Industrial Economics.
    3. Adachi, Takanori, 2020. "Hong and Li meet Weyl and Fabinger: Modeling vertical structure by the conduct parameter approach," Economics Letters, Elsevier, vol. 186(C).

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    More about this item

    Keywords

    Cost pass-through; imperfect competition; perfect competition; production technology;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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