Using Cost Pass-Through to Calibrate Demand

Posted by D. Daniel Sokol

Nathan H. Miller, U.S. Department of Justice, Antitrust Division, Economics Analysis Group, Marc Remer and Gloria Sheu are Using Cost Pass-Through to Calibrate Demand.

ABSTRACT: 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.