Abstract

Evaluating ex ante the economic effects of public policies or market-driven changes requires balancing flexibility and practicality. This is
particularly challenging when firms respond strategically to cost shocks. We introduce' generalized linear competition' (GLC), a new
class of models which allows economists to sidestep estimation of a demand system and requires no assumptions about the mode of
competition, rivals' technologies and strategies, or "equilibrium." We show how, under GLC, firm-level cost pass-through is a sufficient
statistic to calculate the impact of a marginal cost shift on an individual firm's profits. We also show how the GLC framework can be
used for welfare analysis. In an empirical application to the US airline industry, we demonstrate the usefulness of our approach for ex
ante policy evaluation and identify the winners and losers of an environmental policy.