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Title: Constant Pass-Through

Author(s): Kiminori Matsuyama and Philip Ushchev

Publication Date: November 2020

Keyword(s): Constant Elasticity of Substitution (CES), Constant Pass-Through (CoPaTh), Constant Price Elasticity (CPE), H.D.I.A., H.I.I.A., H.S.A., Heterogenous firms, Homothetic Demand Systems and monopolistic competition

Programme Area(s): Industrial Organization, International Macroeconomics and Finance, International Trade and Regional Economics, Macroeconomics and Growth and Monetary Economics and Fluctuations

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.

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Bibliographic Reference

Matsuyama, K and Ushchev, P. 2020. 'Constant Pass-Through'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15475