Demand Curvature and Pass-Through in Differentiated Oligopoly
TLDR
This paper provides a general framework for understanding cost pass-through in differentiated oligopolies, considering demand curvature, substitution, and multiproduct ownership.
Key contributions
- Derives a general pass-through matrix, decomposing price responses by demand curvature, substitution, and ownership.
- Extends classic single-product monopoly insights to multiproduct settings, incorporating diversion and ownership.
- Develops a tractable first-order approximation for empirically relevant demand systems.
- Characterizes small-share limits and how demand specifications impose tail restrictions.
Why it matters
This paper provides a practical and general framework for analyzing cost pass-through in differentiated oligopolies. It's crucial for applied economic work, offering tools to better predict how costs affect prices in complex market structures, particularly in tax incidence and merger analysis.
Original Abstract
This paper studies cost pass-through in differentiated-product oligopoly. I derive a general representation of the pass-through matrix that decomposes equilibrium price responses into the roles of demand curvature, substitution, and multiproduct ownership. This extends the classic insight in single-product monopoly to multiproduct settings in which diversion and ownership also matter. I then develop a tractable first-order approximation that yields a sufficient-statistics characterization for empirically relevant demand systems. Finally, I characterize the small-share limit and show how common demand specifications impose tail restrictions that shape pass-through. The results provide a practical framework for applied work on tax incidence, merger analysis, and related questions in imperfect competition.
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