Identifying the Firm-Specific Cost Pass-Through Rate

Authors:
Orley Ashenfelter, David Ashmore, Jonathan B. Baker and Signe-Mary McKernan
Working Paper:
217

A merger that permits the combined company to reduce the marginal cost of producing a product creates an incentive for it to lower price. Accordingly, the rate at which cost changes are passed through to prices matters to the evaluation of the likely competitive effects of an acquisition. In this paper, we describe our empirical methodology for estimating the cost pass-through rate facing an individual firm, and for distinguishing that rate from the rate at which a firm passes through cost changes common to all firms in an industry. We apply this methodology to determine the firm-specific pass-through rate for Staples, an office superstore chain, and find that this firm historically passed-through firm-specific cost changes at a rate of 15% (i.e. it lowered price on average by 0.15% in response to a 1% decrease in marginal cost).