Working Paper: CEPR ID: DP15475
Authors: Kiminori Matsuyama; Philip Ushchev
Abstract: 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.
Keywords: homothetic demand systems; constant passthrough; constant price elasticity; CPE; constant elasticity of substitution; CES; monopolistic competition; heterogeneous firms
JEL Codes: D21; D43; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| competition intensity (L13) | pricing behavior (D40) |
| markup rates (E43) | firm performance (L25) |
| marginal cost changes (D40) | firm pricing (D49) |
| tougher competition (L19) | prices of all firms (L11) |
| competition intensity (L13) | markup rates (E43) |