Does competition increase pass‐through?

Abstract

AbstractIn recent years, the literature has seen a surge of interest in pass‐through as an economic tool. At the same time, widespread concerns have emerged about the rising market power of firms. How does competition affect pass‐through? A standard intuition is that more competition makes prices more cost‐reflective and hence raises the rate of cost pass‐through. This article shows this conclusion is sensitive to the routine assumption that firms' marginal costs are constant. With modestly convex costs, market power can raise pass‐through (even when it lies below 1). These results have implications for antitrust policy, environmental regulation, and welfare analysis.