36 Pages Posted: 2 Dec 2020
Date Written: November 2020
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
This is a CEPR Discussion Paper. CEPR charges a fee of $8.00 for this paper.
If you wish to purchase the right to make copies of this paper for distribution to others, please select the quantity.