Constant Pass-Through

Kiminori Matsuyama and Philip Ushchev

No 15475, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We propose and characterize parametric families of homothetic demand systems, which feature a constant pass-through rate that is common across otherwise heterogenous monopolistically competitive firms. These parametric families offer natural, flexible, and yet tractable extensions of CES. In the case of complete pass-through, the markup rate is constant, as in CES, yet it can be heterogenous across firms, unlike in CES. In the case of incomplete pass-thorough, the price of each firm is log-linear in its marginal cost and its choke price with the common coefficients across firms. Tougher competition, captured by a lower “average price,†reduces the prices of all firms at a uniform rate, and hence without affecting their relative prices. Yet, it causes a disproportionately larger decline in the revenue and the profit among firms with lower markup rates.

Keywords: Homothetic demand systems; Constant pass-through (copath); Constant price elasticity (cpe); Constant elasticity of substitution (ces); H.s.a.; H.d.i.a.; H.i.i.a.; Monopolistic competition; Heterogenous firms (search for similar items in EconPapers)
JEL-codes: D21 D43 L13 (search for similar items in EconPapers)
Date: 2020-11
New Economics Papers: this item is included in nep-com
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Citations: View citations in EconPapers (1)

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