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Exploiting a Cost Advantage and Coping with a Cost Disadvantage

  • David Besanko

    ()

    (Kellogg Graduate School of Management, Northwestern University, Evanston, Illinois 60208)

  • David Dranove

    ()

    (Kellogg Graduate School of Management, Northwestern University, Evanston, Illinois 60208)

  • Mark Shanley

    ()

    (Krannert School of Management, Purdue University, West Lafayette, Indiana 47907)

This paper provides an empirical investigation of how firms with cost advantages (cost disadvantages) exploit (cope with) their advantages (disadvantages) through their pricing behavior. Guided by microeconomic theory and insights from the industrial organization literature, we develop testable implications about the effect of industry structure and firm-specific characteristics on the pass-through elasticity: The rate at which changes in a firm's cost relative to competitors translates into changes in the firm's price relative to competitors. We test these implications using data from the PIMS Competitive Strategy database. The results indicate that a firm's pass-through elasticity systematically depends on whether the firm operates in a commodity or noncommodity industry, the firm's capacity utilization, and its cost and quality position in its industry. The pass-through elasticity is also shown to depend in a nonlinear way on market concentration.

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File URL: http://dx.doi.org/10.1287/mnsc.47.2.221.9840
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 47 (2001)
Issue (Month): 2 (February)
Pages: 221-235

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Handle: RePEc:inm:ormnsc:v:47:y:2001:i:2:p:221-235
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