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Does competition increase pass-through?

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  • Robert Ritz

    (EPRG, CJBS, University of Cambridge)

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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Robert Ritz, 2019. "Does competition increase pass-through?," Working Papers EPRG1929, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    • Handle: RePEc:enp:wpaper:eprg1929
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    References listed on IDEAS

    as
    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.
    2. Monika Mrázová & J. Peter Neary, 2017. "Not So Demanding: Demand Structure and Firm Behavior," American Economic Review, American Economic Association, vol. 107(12), pages 3835-3874, 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:

    1. Chi Kong Chyong & David Reiner & Dhruvak Aggarwal, 2021. "Market power and long-term gas contracts: the case of Gazprom in Central and Eastern European Gas Markets," Working Papers EPRG2115, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    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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