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A Contribution Margin Approach to Imperfect Competition

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  • Bontems, Philippe

Abstract

This paper studies symmetric oligopoly when marginal cost is not constant. In this environment, the Lerner index is not a sufficient measure of profitability: firms’ relevant margin is the contribution margin, defined relative to variable cost. The paper introduces a contribution margin index and relates it to the Lerner index through a profitability factor. This factor captures the wedge between local markups and average profitability. It also governs comparative statics for cost pass-through, market expansion, entry, profits, and concentration. The framework nests the constant marginal cost benchmark and shows how cost curvature changes the interpretation of standard oligopoly statistics.

Suggested Citation

  • Bontems, Philippe, 2026. "A Contribution Margin Approach to Imperfect Competition," TSE Working Papers 26-1759, Toulouse School of Economics (TSE).
    • Handle: RePEc:tse:wpaper:131904
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    References listed on IDEAS

    as
    1. Delipalla, Sofia & Keen, Michael, 1992. "The comparison between ad valorem and specific taxation under imperfect competition," Journal of Public Economics, Elsevier, vol. 49(3), pages 351-367, December.
    2. 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.
    3. Neale Mahoney & E. Glen Weyl, 2017. "Imperfect Competition in Selection Markets," The Review of Economics and Statistics, MIT Press, vol. 99(4), pages 637-651, July.
    4. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-1277, November.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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