Firm-specific cost savings and market power

We report a policy experiment that illustrates a potential problem of using historical pass-through rates as a means of predicting the competitive con sequences of projected firm-specific cost savings in antitrust contexts, pa rticularly in merger analysis. The effects of cost savings on welfare can v ary vastly, depending on how the savings affect the industry supply schedul e. In a capacity-constrained price-setting oligopoly, we observe that cost savings can overwhelm behaviorally salient market power incentives when the savings affect marginal (hi,oh cost) units. However, cost savings of the s ame magnitude on an infra-marginal unit leave market power unchanged.