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Abstract
We estimate cost pass-through rates based on data for store-level retail prices and
wholesale costs. The data allows us to identify heterogeneity in cost pass-through
across retailers and relate it to underlying explanatory factors such as retailer market
power, measures of consumer search and menu costs. Results from a threshold-errorcorrection-
model clearly provide empirical support for the ‘rockets and feathers’
phenomenon. In contrast to much of the literature which explains the ‘rockets and
feathers’ phenomenon as a result of retailers’ market power, we find contrary find that
the degree of asymmetry between costs and prices is negatively related to a measure of
market power.