Vice President Dov Rothman Publishes on the Economics of Pass-Through with Two-Part Tariff Pricing

May 11, 2015

Pass-through is an important issue in many antitrust cases. For example, consider a cartel of manufacturers of an input. The cartel raises the price of the input and so raises manufacturers' costs. The ultimate effect of the cartel on the end purchasers of the finished product depends on the pass-through of the overcharge through the supply chain. Pass-through is conceptually straightforward in some circumstances. It is the effect of manufacturing cost or acquisition cost on the sale price of a product. In such circumstances, it is well understood that pass-through depends on the competition in a given market and the characteristics of the demand for the product. While this framework may be appropriate in circumstances in which an intermediary buys and then sells a product, it is not necessarily appropriate when the intermediary purchases a product and then sells it along with a complementary good or service. Examples include wireless carriers that purchase and sell handsets with airtime minutes, and distributors that purchase computers and sell them with IT support. In these circumstances, sellers choose the prices of products simultaneously, and the profit-maximizing price of one product may depend on the price of the other product.

In a recent article, "A Note on the Economics of Pass-Through with Two-Part Tariff Pricing" (Journal of Competition Law & Economics, May 2015), Vice President Dov Rothman examines the pricing behavior of firms as it relates to whether or not to pass through a change in the cost of one product when that product is sold together with a second product. In such circumstances, firms may rely on what is known as a two-part tariff. Dr. Rothman explains that a cost increase may or may not be passed through to final consumers. Indeed, depending on the characteristics of final consumers' demand, a cost increase could result in no increase in the price of either product, an increase in the price of both products, or an increase in the price of one product and a decrease in the price of the other product.

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