Cost Pass-Through in Differentiated Product Markets: The Case of U.S. Processed Cheese

Abstract

In this paper, we estimate a mixed logit model for demand in the U.S. processed cheese market. The estimates are used to determine pass-through rates of cost changes under different behavioral regimes. We find that, under collusion, the pass-through rates for all brands fall between 21% and 31% while, under Nash-Bertrand price competition, the range of pass-through rates is between 73% and 103%. The mixed logit model provides a more flexible framework for studying pass-through rates than the logit model since the curvature of the demand functions depends upon the empirical distribution of consumer types.