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The Economics of Pass-Through With Production Constraints

Dov Rothman et al., Journal of Competition Law & Economics, May 2016

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This article reviews the implications of production constraints for pass-through. We consider production technology that can only be adjusted in discrete intervals and/or is costly to adjust. We show that, because of production constraints, a firm may not be willing to adjust its level of production in response to small changes in cost. Because price is determined by demand and the quantity produced, production constraints may result in a firm not changing price in response to a change in cost. This result has important implications for antitrust litigation—for example, the extent to which overcharges resulting from anticompetitive conduct upstream in the supply chain are passed through to purchasers downstream in the supply chain.

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