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IO and Competition Policy (Fach) / Cost-Pass through (Lektion)

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• Determinants of cost-pass through 1. Firm-specific versus industry-wide cost change 2. Market structure 3. Slope of the MC curve 4. Share of input in downstream MC curve 
• Market structure In case of an unconcentrated market • The impact of industry-wide cost increase is borne more by the side that values the market the most • Firm-specific cost changes are not passed through In a concentrated market, part of the cost change will always be passed-through. How much depends on the curvature of the demand curve 
• The impact of the slope of the cost structure When increasing marginal costs reflect capacity constraints, less pass-though because higher price reduces quantity and hence eases the capacity constraint 
• Competition and pass-through: policy implications Economics predicts that as competition increases, so does industry-wide cost pass-through For firm-specific cost changes, pass-through declines in many cases as competition increases. Ec Guidelines on Art. 101(3): The greater the degree of residual competition, the more likely it is that individual undertakings will try to increase their sales by passing on cost efficiencies Agreements between large firms generating firm-specific cost efficiencies? Merger giving rise to a large combined share and merger-specific cost reduction? 
• Empirical estimation of pass-through Limited empirical work available No ”regular” results Empirical tools internal documents documenting the impact of large historical cost changes  econometric techniques (allowing for adjustment lags, differential reaction to up and downward change) Limits: other potential influences, dependance of the results on the specific type of demand, long-run rather than short-run pricing 
• Cost pass-through and UPP GUPPI: gross upward pricing pressure index used with a firm-specific pass-through rate to arrive at IPR: indicative price rise Using industry-wide cost pass-through will overestimate the likely magnitude of the firm-specific cost pass-through and hence overstate the predicted price increase 
• Cost pass-through in vertical settings In vertical settings, several levels of pass-through A higher downstream pass-through increases the retailer’s bargaining power with a manufacturer and reduces the manufacturer’s incentive to mark-up the wholesale price ⇒ reduces double marginalisation As the downstream pass-through rate increases, the upstream producer suffers a greater loss of volume when it increases its wholesale price and so the more price-sensitive its perceived demand. A credible commitment by a retailer to pass-through could deter a manufacturer raising its wholesale price in the first place 
• Conclusions The economics challenges the often stated view that more competition gives rise to greater pass-through. All else equal, a given firm-specific marginal cost saving may be more likely to benefit consumers when it applies to a firm with a high market share. 

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