UC Berkeley

We empirically analyse a possible channel for the existence of asymmetric price-cost pass-through, that is, of prices responding differently to negative and positive upstream cost shocks. While the existence of asymmetric price-cost pass-through has been documented in many markets, possible causes for such a phenomenon have not been investigated empirically. Using consumer panel data in the coffee retail sector in France, we structurally estimate a demand model allowing for asymmetric consumer responses to positive and negative retail price changes. According to the demand estimates, we indeed find significant evidence that consumers react differentially to positive and negative price movements, in that demand is less elastic to price increases than to price decreases. Then, using counterfactual simulations within an equilibrium model of demand and supply side behaviour, we investigate empirically the extent to which the existence of the estimated demand asymmetries contributes to asymmetric responses of equilibrium prices of imperfectly competing firms, given upstream negative and positive cost shocks. We do so by simulating positive and negative costs shocks, given the estimated demand model with asymmetric demand responses. We compare those changes in prices to changes in prices resulting from the same magnitude of cost shocks under a counterfactual demand structure without demand asymmetries. Our findings suggest that not allowing for asymmetries in demand implies similar magnitudes of simulated price-cost pass-through rates from positive and negative cost shocks. When we allow for demand asymmetries, however, a positive cost shock is passed through to retail prices to a greater degree than a negative cost shock of the same magnitude. Our findings imply that the shape of the demand curve could explain observed asymmetric price transmission of cost shocks in the context of imperfectly competitive markets.