Cost Pass Through and Asymmetric Price Transmission

This chapter outlines the theoretical concept of price transmission mechanism or cost pass through and elucidates the links between market power and asymmetric price transmission. It then provides an overview of the relation between oligopsony and cost pass through, and the relation of oligopoly and cost pass through. The chapter also delineates some early models of asymmetric price transmission used in the literature. It then presents both general empirical findings and those specific to the milk, petroleum, and electricity industries. Loy et al. (2016) used the term vertical price transmission and Cost Pass Through (CPT) “to characterize the impact of factor price (cost) changes on downstream product prices” (Loy et al. 2016, p. 184). For the purposes of the present study, the terms ‘cost pass through’ (CPT) or ‘asymmetric price transmission/asymmetric cost pass through’ (APT) are applied to both the pass through of an input price change to the wholesale price, and an input price change to the retail price.