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Firm-Specific Cost Savings and Market Power

Douglas D. Davis and Bart J. Wilson
Economic Theory
Vol. 16, No. 3, Symposium: Experimental Markets (Nov., 2000), pp. 545-565
Published by: Springer
Stable URL: http://www.jstor.org/stable/25055348
Page Count: 21
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Firm-Specific Cost Savings and Market Power
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Abstract

We report a policy experiment that illustrates a potential problem of using historical pass-through rates as a means of predicting the competitive consequences of projected firm-specific cost savings in antitrust contexts, particularly in merger analysis. The effects of cost savings on welfare can vary vastly, depending on how the savings affect the industry supply schedule. In a capacity-constrained price-setting oligopoly, we observe that cost savings can overwhelm behaviorally salient market power incentives when the savings affect marginal (high cost) units. However, cost savings of the same magnitude on an infra-marginal unit leave market power unchanged.

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