Pass-through rates when firms can vary package sizes

Abstract

I show that when firms can change the quantity of product offered in each package, the standard pass-through rate calculations need to be adjusted. In particular, if a firm's cost increases, the firm decreases the quantity of the product offered and the price of the package, resulting in a negative pass-through rate. Calculating the pass-through rate using the per-unit quantity price restores the expected positive pass-through rate. The results are confirmed by many observations from the industry and continue to hold when firms offer a product line and engage in second-degree price discrimination.