DP15127 Generalized linear competition: From pass-through to policy

Author(s): Christos D. Genakos, Felix Grey, Robert Ritz
Publication Date: August 2020
Keyword(s): Airlines, Carbon Pricing, Imperfect Competition, Pass-Through, political economy, regulation
JEL(s): D43, H23, L51, L93
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15127

Economic policy and shifts in input market prices often have significant effects on the marginal costs of firms and can prompt strategic responses that make their impact hard to predict. We introduce "generalized linear competition" (GLC), a new model that nests many existing theories of imperfect competition. We show how firm-level cost pass-through is a sufficient statistic to calculate the impact of a cost shift on an individual firm's profits. GLC sidesteps estimation of a demand system and requires no assumptions about the mode of competition, rivals' technologies and strategies, or "equilibrium" . In an empirical application to the US airline market, we demonstrate GLC's usefulness for ex ante policy evaluation and identify the winners and losers of climate-change policy. We also show how GLC's structure, under additional assumptions, can be used for welfare analysis and to endogenize the extent of regulation.