Abstract

Understanding how cost changes impact prices is fundamental for many areas of economics, but there is limited theoretical understanding of the determinants of pass-through within settings where prices are dispersed. Under a general demand function, we analyse cost pass-through within a seminal model of price dispersion where consumers vary in their level of market engagement (Varian 1980). We show how the curvature of demand remains key in understanding cost pass-through.

• whether expected pass-through rates are less or greater than one
• whether price dispersion increases or decreases following a cost rise
• whether a cost increase will have a greater impact on the prices paid by more or less engaged consumers
• how competition affects cost pass-through

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