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Using cost pass-through to calibrate demand

Nathan H. Miller, Marc Remer and Gloria Sheu

Economics Letters, 2013, vol. 118, issue 3, 451-454

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.

Keywords: Cost pass-through; Demand calibration; Merger simulation (search for similar items in EconPapers)
JEL-codes: K21 L13 L41 (search for similar items in EconPapers)
Date: 2013
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