Using Cost Pass-Through to Calibrate Demand
Economic Analysis Group Discussion Paper EAG 12-9
10 Pages Posted: 15 Nov 2012
Date Written: October 2012
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