Focal pricing and pass-through

The degree of pass-through of input cost changes is relevant in several contexts, including estimating antitrust damages and evaluating the impact of changes in taxation. In recent antitrust cases it has been alleged that the adoption of focal pricing by firms reduces the degree of pass-through in an industry. I show that this claim is not theoretically sound by outlining a simple model where focal pricing leaves expected pass-through unaffected. However, focal pricing does lead to more lumpiness in the distribution of pass-through. This paper reinforces the importance of context-specific empirical analysis to determine the degree of pass-through in an industry, regardless of the presence of focal pricing.