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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.

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