We provide a general non-parametric framework of variable markups in the presence of production networks. The framework does not impose structural assumptions on market environment, demand or production, and delivers elasticities that can be directly taken to the data. Our approach allows to estimate pass-through and firms’ responses to environment’s prices without the need to estimate marginal costs, but relies on observed firm-level price changes and input shares. Combined with the observation that firms are connected through buyer-supplier relationships, in- complete pass-through and price competition have profound implications for propagation and aggregation properties in terms of the exchange rate disconnect puzzle, monetary policy and productivity shocks.
