Competition and cost pass-through in differentiated oligopolies

Paul Zimmerman () and Julie A. Carlson

MPRA Paper from University Library of Munich, Germany

Abstract: The impact that competition exerts on the incentives of firms to pass through reductions in their marginal costs is an important consideration in assessing the performance of alternate market structures. This paper examines the role of product differentiation on firm-specific and industry-wide pass-through rates. Relying on Shubik’s (1980) model of differentiated Cournot competition with linear demand, we show that there exists an initial critical range over which the firm-specific cost pass-through rate decreases in the number of firms. Beyond this range the rate continually increases – approaching 50 percent as the number of firms goes to infinity. This contrasts with a model of differentiated Bertrand competition in which cost pass through monotonically decreases in the number of firms. The disparate effects across the Cournot and Bertrand models are shown to stem from the influence of competition and product differentiation on the respective firm reaction functions. Suggestions for future empirical work based upon the models’ predictions and implications for antitrust policy are also discussed.

Keywords: Competitive effects; Oligopoly; Merger; Pass-through; Product differentiation (search for similar items in EconPapers)
JEL-codes: L13 L40 (search for similar items in EconPapers)
Date: 2010-10-15
New Economics Papers: this item is included in nep-bec, nep-com and nep-ind
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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