Using Cost Pass-Through to Calibrate Demand

We demonstrate that cost pass-through can be used to inform demand calibration, potentially eliminating the need for data on margins, diversion, or both. We derive the relationship between cost pass-through and consumer demand using a general oligopoly model of Nash-Bertrand competition and develop specific results for four demand systems: linear demand, logit demand, the Almost Ideal Demand System (AIDS), and log-linear demand. The methods we propose may be useful to researchers and antitrust authorities when reliable measures of margins or diversion are unavailable.

Keywords: cost pass-through, demand calibration, merger simulation

JEL Classification: K21, L13, L41

Suggested Citation: Suggested Citation

Miller, Nathan and Remer, Marc and Sheu, Gloria, Using Cost Pass-Through to Calibrate Demand (October 2012). Economic Analysis Group Discussion Paper EAG 12-9, Available at SSRN: https://ssrn.com/abstract=2175096 or http://dx.doi.org/10.2139/ssrn.2175096