Exploiting a cost advantage and coping with a cost disadvantage

David Besanko*, David Dranove, Mark Shanley

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

15 Scopus citations

Abstract

This paper provides an empirical investigation of how firms with cost advantages (cost disadvantages) exploit (cope with) their advantages (disadvantages) through their pricing behavior. Guided by microeconomic theory and insights from the industrial organization literature, we develop testable implications about the effect of industry structure and firm-specific characteristics on the pass-through elasticity: The rate at which changes in a firm's cost relative to competitors translates into changes in the firm's price relative to competitors. We test these implications using data from the PIMS Competitive Strategy database. The results indicate that a firm's pass-through elasticity systematically depends on whether the firm operates in a commodity or noncommodity industry, the firm's capacity utilization, and its cost and quality position in its industry. The pass-through elasticity is also shown to depend in a nonlinear way on market concentration.

Original languageEnglish (US)
Pages (from-to)221-235
Number of pages15
JournalManagement Science
Volume47
Issue number2
DOIs
StatePublished - Feb 2001

Keywords

  • Competitive Advantage
  • Competitive Strategy
  • Cost Pass-Through
  • Pricing

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

Fingerprint Dive into the research topics of 'Exploiting a cost advantage and coping with a cost disadvantage'. Together they form a unique fingerprint.

Cite this