Discussion paper

DP15475 Constant Pass-Through

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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Citation

Matsuyama, K and P Ushchev (eds) (2020), “DP15475 Constant Pass-Through”, CEPR Press Discussion Paper No. 15475. https://cepr.org/publications/dp15475