Bontems, Philippe (2026) Not so Costly: Cost Structure and Firm Behavior. TSE Working Paper, n. 26-1760

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Abstract

This paper develops a tractable framework for monopoly and monopolistic com-petition with non-constant marginal costs. Flexible cost structures are summarized by sufficient statistics: the contribution margin, a profitability scale factor, and a composite curvature index. The scale factor measures the elasticity of operating profits to market size and governs the wedge between the contribution margin and the Lerner index. The framework delivers pass-through formulas for cost shocks and links its objects to accounting, demand, production, and pass-through data. Applied to market expansion, it shows how flexible costs can amplify, dampen, or overturn Matthew effects (“Rich get richer, poor get poorer").