Environmental Economics Seminar
Not so Costly: How Cost Flexibility Influences Firm Behavior
Research Professor (INRA) at Toulouse School of Economics
Assumptions on preferences and technologies matter in an important way for deriving comparative results in trade, industrial organization and other fields. For instance, standard models of trade virtually all assume constant marginal cost of production and shipping for the sake of tractability. However, these assumptions seem at odds with the reality of logistics activities and cannot easily be invoked to explain a number of puzzles in trade like the observed rapid falloff of trade flows with distance. The assumption of economies of scale in production driven by the presence of fixed cost associated to constant marginal cost is equally restrictive. Indeed, there are many reasons to believe that increasing marginal cost are also important to explain firms behavior.
There are two ways to escape from the constant marginal cost assumption: (i) find tractable but flexible forms for demand and cost to generate closed form solutions (see Fabinger & Weyl, 2018) or (ii) show that actually many comparative results depend only on a limited number of demand and cost characteristics (see Mrazova & Neary (2017) for an approach that focuses on demand only).
This paper takes the second route and introduce a new way to capture the crucial features of cost and demand to characterize firm’s optimization conditions.From this, I first derive novel pass-through formulas, that I compare to the ones proposed in the literature. I then apply these concepts to study (i) conditions under which taxation lies on the wrong side of the La↵er curve, and (ii) how globalization impacts firms profits and welfare in a Krugman and in a Melitz like trade models for general cost and demand structure. I also provide an extension to markets with oligopolies to study multidimensional pass-throughs and regulation incidence.
JEL : D21, F12.
Key-words: Pass-Through, Flexible Marginal Cost, Heterogeneous Firms
Dates & time