Understanding Cost Pass-Through When Prices Are Dispersed

Abstract We study cost pass-through in a model of price dispersion where consumers differ in the number of firms they consider. By analysing how cost changes affect each quantile of the price distribution, we demonstrate how the effects on price dispersion and consumers’ expected purchase prices depend upon whether demand is log-concave or log-convex. We further show that consumers who consider fewer firms tend to experience a relatively smaller change to their surplus. This provides new insights into the distributional consequences of cost changes. Additionally, we examine the relation to demand shocks and the roles of competition and endogenous consideration sets.