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Market Structure, Cost Pass-Through and Welfare with Differentiated Products

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    Abstract

    In this paper, we estimate a mixed logit model for the U.S. processed cheese market and implement cost pass-through simulations and related consumer welfare analysis under different regimes of competition. In the model, the curvature of demand is determined to a significant extent by the empirical distribution of consumers. This property reduces the prediction errors of cost pass-through caused by an erroneous assumption as to the functional form of demand. We find that, under collusion, the pass-through rates for all brands fall between 23% and 37% and under Nash price competition, the range of pass-through is 67% ~ 98%.

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    File URL: http://www.iuj.ac.jp/workingpapers/index.cfm?File=EMS_2006_05.pdf
    File Function: First version, 2006
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    Bibliographic Info

    Paper provided by Research Institute, International University of Japan in its series Working Papers with number EMS_2006_05.

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    Length: 29 pages
    Date of creation: Jan 2006
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    Handle: RePEc:iuj:wpaper:ems_2006_05

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    Keywords: Market Structure; Cost Pass-Through; Consumer Welfare; Mixed Logit;

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    1. Harvey S. Rosen & Kenneth A. Small, 1979. "Applied Welfare Economics with Discrete Choice Models," NBER Working Papers 0319, National Bureau of Economic Research, Inc.
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    16. Heien, Dale & Wessells, Cathy Roheim, 1990. "Demand Systems Estimation with Microdata: A Censored Regression Approach," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 365-71, July.
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    18. Sullivan, Daniel, 1985. "Testing Hypotheses about Firm Behavior in the Cigarette Industry," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 586-98, June.
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