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Using cost pass-through to calibrate demand

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  • Miller, Nathan H.
  • Remer, Marc
  • Sheu, Gloria

Abstract

We demonstrate that cost pass-through can be used to inform demand calibration, potentially eliminating the need for data on margins, diversion, or both. We derive the relationship between cost pass-through and consumer demand using a general oligopoly model of Nash–Bertrand competition and develop specific results for four demand systems: linear demand, logit demand, log-linear demand and the Almost Ideal Demand System (AIDS). The methods we propose may be useful to researchers and antitrust authorities when reliable measures of margins or diversion are unavailable. We also develop that cost pass-through can help illuminate the suitability of some demand systems to specific economic applications.

Suggested Citation

  • Miller, Nathan H. & Remer, Marc & Sheu, Gloria, 2013. "Using cost pass-through to calibrate demand," Economics Letters, Elsevier, vol. 118(3), pages 451-454.
    • Handle: RePEc:eee:ecolet:v:118:y:2013:i:3:p:451-454
    DOI: 10.1016/j.econlet.2012.12.021
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    References listed on IDEAS

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    1. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    2. Nathan H. Miller & Conor Ryan & Marc Remer & Gloria Sheu, 2012. "Approximating the Price Effects of Mergers: Numerical Evidence and an Empirical Application," EAG Discussions Papers 201208, Department of Justice, Antitrust Division.
    3. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-326, June.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Robert A. Ritz, 2018. "Oligopolistic competition and welfare," Chapters, in: Luis C. Corchón & Marco A. Marini (ed.), Handbook of Game Theory and Industrial Organization, Volume I, chapter 7, pages 181-200, Edward Elgar Publishing.
    2. Jéssica Dutra & Tarun Sabarwal, 2020. "Antitrust analysis with upward pricing pressure and cost efficiencies," PLOS ONE, Public Library of Science, vol. 15(1), pages 1-31, January.
    3. Takanori Adachi & Michal Fabinger, 2017. "Multi-Dimensional Pass-Through, Incidence, and the Welfare Burden of Taxation in Oligopoly," CIRJE F-Series CIRJE-F-1040, CIRJE, Faculty of Economics, University of Tokyo.
    4. Erich Muehlegger & Richard L. Sweeney, 2017. "Pass-Through of Own and Rival Cost Shocks: Evidence from the U.S. Fracking Boom," NBER Working Papers 24025, National Bureau of Economic Research, Inc.
    5. Takanori Adachi & Michal Fabinger, 2017. "Multi-Dimensional Pass-Through and Welfare Measures under Imperfect Competition," Papers 1702.04967, arXiv.org, revised Dec 2018.
    6. MacKay, Alexander & Miller, Nathan H. & Remer, Marc & Sheu, Gloria, 2014. "Bias in reduced-form estimates of pass-through," Economics Letters, Elsevier, vol. 123(2), pages 200-202.
    7. Miller, Nathan H. & Remer, Marc & Ryan, Conor & Sheu, Gloria, 2017. "Upward pricing pressure as a predictor of merger price effects," International Journal of Industrial Organization, Elsevier, vol. 52(C), pages 216-247.
    8. Jessica Dutra & Tarun Sabarwal, 2018. "Cost Efficiencies and Upward Pricing Pressure," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201901, University of Kansas, Department of Economics.
    9. Duso, Tomaso & Szücs, Florian, 2017. "Market power and heterogeneous pass-through in German electricity retail," European Economic Review, Elsevier, vol. 98(C), pages 354-372.
    10. Nathan H. Miller & Marc Remer & Conor Ryan & Gloria Sheu, 2016. "Pass-Through and the Prediction of Merger Price Effects," Journal of Industrial Economics, Wiley Blackwell, vol. 64(4), pages 683-709, December.
    11. Paul S. Koh, 2024. "Merger Analysis with Latent Price," Papers 2404.07684, arXiv.org, revised Feb 2025.
    12. Takanori Adachi & Muhammad Michal Fabinger, 2017. "Multi-Dimensional Pass-Through, Incidence, and the Welfare Burden of Taxation in Oligopoly," CIRJE F-Series CIRJE-F-1040, CIRJE, Faculty of Economics, University of Tokyo.
    13. 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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    More about this item

    Keywords

    Cost pass-through; Demand calibration; Merger simulation;
    All these keywords.

    JEL classification:

    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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