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Does competition increase pass‐through?

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  • Robert A Ritz

Abstract

In recent years, the literature has seen a surge of interest in pass‐through as an economic tool. At the same time, widespread concerns have emerged about the rising market power of firms. How does competition affect pass‐through? A standard intuition is that more competition makes prices more cost‐reflective and hence raises the rate of cost pass‐through. This article shows this conclusion is sensitive to the routine assumption that firms' marginal costs are constant. With modestly convex costs, market power can raise pass‐through (even when it lies below 1). These results have implications for antitrust policy, environmental regulation, and welfare analysis.

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  • Robert A Ritz, 2024. "Does competition increase pass‐through?," RAND Journal of Economics, RAND Corporation, vol. 55(1), pages 140-165, March.
    • Handle: RePEc:bla:randje:v:55:y:2024:i:1:p:140-165
    DOI: 10.1111/1756-2171.12461
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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.
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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

    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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