Title: Competition and cost pass-through in differentiated oligopolies
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 structur...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.Read More
Publication Year: 2010
Publication Date: 2010-10-15
Language: en
Type: article
Access and Citation
Cited By Count: 8
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot