Working Paper: CEPR ID: DP15127
Authors: Christos Genakos; Felix Grey; Robert Ritz
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: passthrough; imperfect competition; regulation; carbon pricing; airlines; political economy
JEL Codes: D43; H23; L51; L93
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Cost shifts (H22) | Firm profits (L21) |
| Cost passthrough rate < 100% (L97) | Firm profits decline with cost increase (D21) |
| Cost passthrough rate > 100% (L97) | Firm profits increase (D21) |
| Passthrough rate (H22) | Profit impact (L21) |
| Passthrough rate captures all relevant information (H22) | Profit impacts (D33) |
| Cost shifts (H22) | Profit impacts across various models of oligopoly (D43) |