Thursday, January 17, 2013

Pass Through

From a notice DirectTV mailed to me this week:
In 2013, the programming costs we pay to owners of television channels will increase by about 8.0%, but we have chosen to adjust the prices our customers pay by an average of only 4.5%.
They're just being nice not increasing the price by the full 8%, right? Well, not really. Economists use the term pass through to denote the ratio of a price change relative to a change in the marginal cost (e.g. a supply shock or tax increase). It's not always 100%, not even for a profit maximizing monopolist. It depends on supply and demand*. In fact, for a monopolist facing linear demand, pass through is 50%.

* In particular, demand and supply elasticities, and in the case of a monopolist, the curvature of the demand curve, as well.

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