Constant Pass-Through

36 Pages Posted: 2 Dec 2020

See all articles by Kiminori Matsuyama

Kiminori Matsuyama

Northwestern University - Department of Economics

Philip Ushchev

HSE University

Date Written: November 2020

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.

JEL Classification: D21, D43, L13

Suggested Citation

Matsuyama, Kiminori and Ushchev, Philip, Constant Pass-Through (November 2020). CEPR Discussion Paper No. DP15475, Available at SSRN: https://ssrn.com/abstract=3737608

Kiminori Matsuyama (Contact Author)

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States
847-491-8490 (Phone)
847-491-7001 (Fax)

Philip Ushchev

HSE University ( email )

3a Kantemirovskaya St, room 405
123 Griboedov Canal Embankment, room 123
Saint-Petersburg, Saint Petersburg 191119
Russia

HOME PAGE: http://https://sites.google.com/site/philipushchev/

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