Product Differentiation and Cost Pass-Through

The present paper extends the existing literature on vertical price transmission and cost pass-through by investigating the impact of product differentiation. We apply distance-measures of product differentiation to a specific product market (yoghurt) within one country (Germany). Results from a panel-error-correction model for 30 products sold in 432 stores over a period of 312 weeks suggest that product differentiation explains a significant share of differences in cost pass-through rates: more differentiated products command higher prices and are characterised by lower equilibrium cost pass-through rates as well as more sluggish price adjustment.