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Faculty of Economics

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Genakos, C., Grey, F., and Ritz, R.

Generalized linear competition: From pass-through to policy

CWPE2078

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: Pass-through, imperfect competition, regulation, carbon pricing, airlines, political economy

JEL Codes: D43 H23 L51 L93

Author links: Felix Grey  Robert Ritz  

PDF: https://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe2078.pdf

EPRG Paper Link: 2023

Open Access Link: https://doi.org/10.17863/CAM.61839