The Simple Economics of Asymmetric Cost Pass-Through

Robert Ritz

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: In response to cost changes, prices often rise more strongly or quickly than they fall. This phenomenon has attracted attention from economists, policy makers, and the general public for decades. Many assert that it cannot be explained by standard economic theory, and is evidence for "anti-competative" behaviour by firms. This paper argues against this conventional wisdom; it shows that simple price theory can, in principle, account for such asymmetric pass-through - even with perfect competition. From a policy perspective, knowledge of cost pass-through patterns in a market does not allow for strong inferences on the intensity of competition.

Keywords: Asymmetric price transmission; cost pass-through; electricity markets; price theory; rockets and feathers (search for similar items in EconPapers)
JEL-codes: D40 L11 L94 (search for similar items in EconPapers)
Date: 2015-06-11
New Economics Papers: this item is included in nep-com and nep-reg
Note: rar36
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Working Paper: The Simple Economics of Asymmetric Cost Pass-Through (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1515

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