Exploiting a cost advantage and coping with a cost disadvantage

This paper provides an empirical investigation of how firms with cost advan tages (cost disadvantages) exploit (cope with) their advantages (disadvanta ges) through their pricing behavior. Guided by microeconomic theory and ins ights from the industrial organization literature, we develop testable impl ications about the effect of industry structure and firmspecific characteri stics 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 r elative to competitors. We test these implications using data from the PIMS Competitive Strategy database. The results indicate that a firm's pass-thr ough elasticity systematically depends on whether the firm operates in a co mmodity or noncommodity industry, the firm's capacity utilization, and its cost and quality position in its industry. The pass-through elasticity is a lso shown to depend in a nonlinear way on market concentration.