A Contribution Margin Approach to Imperfect Competition

Abstract

This paper studies symmetric oligopoly when marginal cost is not constant. In this environment, the Lerner index is not a sufficient measure of profitability: firms’ relevant margin is the contribution margin, defined relative to variable cost. The paper introduces a contribution margin index and relates it to the Lerner index through a profitability factor. This factor captures the wedge between local markups and average profitability. It also governs comparative statics for cost pass-through, market expansion, entry, profits, and concentration. The framework nests the constant marginal cost benchmark and shows how cost curvature changes the interpretation of standard oligopoly statistics.

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Reference

Philippe Bontems, “A Contribution Margin Approach to Imperfect Competition”, TSE Working Paper, n. 26-1759, June 2026.