Generalized Linear Competition: From Pass-Through to Policy

83 Pages Posted: 18 Aug 2020

See all articles by Christos Genakos

Christos Genakos

Cambridge Judge Business School; Athens University of Economics and Business (AUEB); Center for Economic Policy Research (CEPR); Center for Economic Performance (CEP)

Felix Grey

University of Cambridge - Faculty of Economics

Robert A. Ritz

University of Cambridge - Judge Business School

Date Written: August 2020

Abstract

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.

Keywords: Airlines, Carbon Pricing, Imperfect Competition, Pass-Through, political economy, regulation

JEL Classification: D43, H23, L51, L93

Suggested Citation

Genakos, Christos and Grey, Felix and Ritz, Robert A., Generalized Linear Competition: From Pass-Through to Policy (August 2020). Available at SSRN: https://ssrn.com/abstract=3674903

Christos Genakos (Contact Author)

Cambridge Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Athens University of Economics and Business (AUEB) ( email )

76 Patission Street
Athens, 104 34
Greece

HOME PAGE: http://www.aueb.gr/users/cgenakos

Center for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Center for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Felix Grey

University of Cambridge - Faculty of Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

Robert A. Ritz

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

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