Does competition increase pass-through?

Robert Ritz

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

Abstract: How does market power affect the rate of pass-through from marginal cost to the market price? A standard intuition is that more competition makes prices more “cost-reflective” and thus raises cost pass-through. This paper shows that this intuition is sensitive to the common assumption in the literature that firms’ marginal costs are constant. If firms have even modestly increasing marginal costs, more intense competition actually reduces pass through. These results apply to the “normal” case where pass-through is less than 100%. They have implications for competition policy and environmental regulation.

Keywords: Cost pass-through; imperfect competition; perfect competition; production technology (search for similar items in EconPapers)
JEL-codes: D24 D41 D42 D43 (search for similar items in EconPapers)
Date: 2019-08-21
New Economics Papers: this item is included in nep-com, nep-gth, nep-ind and nep-reg
Note: rar36
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Does competition increase pass‐through? (2024)
Working Paper: Does competition increase pass-through? (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1974

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