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Pass-Through of Own and Rival Cost Shocks: Evidence from the U.S. Fracking Boom
Abstract
In imperfectly competitive settings, a firm's price depends on its own costs as well as those of its competitors. We demonstrate that this has important implications for the estimation and interpretation of pass-through. Leveraging a large input cost shock resulting from the fracking boom, we isolate price responses to firm-specific, regional and industry-wide input cost shocks in the US oil refining industry. The pass-through of these components vary from near zero to full pass-through, reconciling seemingly disparate results from the literature. We illustrate the policy implications of rival cost pass-through in the context of a tax on refinery carbon emissions.
... In addition to the timing-based criteria, we require incident-specific clean control stores to be located between 30 to 50 miles from the respective victimized store (which we refer to as unaffected local markets). These conditions ensure a sizeable control group that is comparable to our treatment group while at the same time minimizing confounding effects from spillovers to nearby stores (Muehlegger and Sweeney, 2022). 4 Our paper is one of the first to extend the stacked DiD framework to spatial criteria, contributing to the advancing literature on this methodology (Cengiz et al., 2019;Deshpande and Li, 2019;Butters et al., 2022;Wing et al., 2024). ...
... One concern is strategic complementarity in pricing. Muehlegger and Sweeney (2022) show that in the presence of imperfect competition, the strategic response of (untreated) competitors may disqualify them as a valid control group. In practice, this implies that the price a firm sets is a function of not just its own costs, but also those of its rivals. ...
... Section 7.2 examines how retailers adjust their prices in response to changes in marginal cost, utilizing methodologies from the extensive literature on cost pass-through (e.g. Hollenbeck and Uetake, 2021;Muehlegger and Sweeney, 2022;Conlon and Rao, 2020;Miller et al., 2017). Our objective in estimating the marginal cost pass-through rate is twofold. ...
This paper shows that retailers increase prices in response to organized retail crime, revealing a substantial aspect of retail crime's social costs. We match detailed information on store-level crimes to administrative scanner data from the universe of transactions for cannabis retailers in Washington state. Exploiting quasi-experimental variation from the timing of store-level robberies and burglaries, we find that crimes cause a 1.8% increase in retail prices at victimized stores. Nearby rivals of victimized stores increase prices by a similar amount with a two-month lag. Retailers' price responses are not driven by demand effects, increased wholesale costs, or strategic price responses. Instead, they are consistent with precautionary security expenditures. We find the largest pass-through rates for independent stores and in less concentrated markets. We estimate that crime imposes a 1% "hidden" unit tax on affected stores, implying an annual negative welfare effect of approximately $30.6 million, with consumers bearing two-thirds of this burden.
... Intuitivement, si la réglementation augmente les coûts, alors les industries ayant une densité de réglementation plus élevée devraient voir une croissance plus forte de leurs indices de prix. Des travaux antérieurs construisent des mesures similaires en utilisant la densité réglementaire pondérée (Cai & Szeidl, 2022;Muehlegger & Sweeney, 2021;Rotemberg, 2019). Toutefois, une caractéristique clé de notre procédure est l'utilisation de la théorie des indices des prix afin d'identifier une pondération correcte. ...
... But if cost shocks spillover across or within firms -as they do in almost any model of imperfect competition -the stable unit treatment value assumption (SUTVA) fails, invalidating DiD estimators. A handful of recent papers explicitly address inter-firm spillover effects (Cai & Szeidl, 2022;Muehlegger & Sweeney, 2021;Rotemberg, 2019) and intra-firm spillover effects (Giroud & Mueller, 2019;Bartram et al., 2022;Gibson, 2019;Soliman, 2020) in isolation. This paper first fol-lows their example in revealing reduced-form evidence of spillovers across firms within an industry and across plants within a regulated firm in the context of the European Union Emission Trading Scheme (EU ETS) regulating French manufacturers. ...
... Intuitively, if regulation increases costs, then industries with higher regulation density should see higher growth in their price indices. Previous work, which we designate as the local approximation (LA) method, uses base-year weighted regulation density (Cai & Szeidl, 2022;Muehlegger & Sweeney, 2021;Rotemberg, 2019). A key feature of our procedure is that we rely on price index theory to guide the construction of these weights. ...
The three chapters of this thesis are independent and contribute to environmental economics through different approaches. The first chapter, Inter-Firm and Intra-Firm Spillover Effects of Industrial Regulation, co-authored with Geoffrey Barrows, Raphael Calel, and Hélène Ollivier, presents a new method for estimating the impact of a regulation in the presence of inter- and intrafirm spillover effects. In particular, when competition is imperfect, a regulation targeting some firms is also likely to affect unregulated firms. Thus, the traditional difference-indifferences approach will not evaluate the full impact of the regulation. To overcome this limitation, we develop a structural model and an empirical strategy to estimate the effects of a regulation affecting a sub-population of industrial facilities. We apply our method to the European Emission Trading System and show that it reduced carbon emissions from regulated facilities as well as from the French manufacturing sector as a whole, butincreased revenues of regulated French firms. While pollution should be reduced in more densely populated locations, stringent regulations may also harm local industries and reduce workers’ incomes. In the second chapter, entitled An Optimal Distribution of Polluting Activities Across Space, I analyze these conflicting forces using a spatial economics model to identify which cities should be targeted by air quality policies. When the effects of pollution are not internalized by firms and workers respond to poor air quality by migrating away, then the largest cities may be too small compared to the optimum. Imposing a higher pollution price in these locations relative to the rest of the country would lead to higher welfare. The empirical application on French cities shows that current policies impose higher emission prices in large cities, but welfare gains are still possible. There is a lot of evidence that air pollution has negative effects on the productivity of industrial workers. However, little is known about its consequences on the economic performance of firms that employ these workers. In the third chapter, The Effects of Air Pollution on Exports: Evidence from PM2.5 & French Firms, co-authored with Geoffrey Barrows and Hélène Ollivier, we examine the effects of temporary and local increases in PM2.5 air concentration on the exports of French firms. Our approach relies on highly disaggregated data, both in space and in time. To estimate the causal impact of pollution on exports, we instrument local pollution concentrations using exogenous variations in wind direction over time. We find that higher pollution levels lead to lower export values and quantities.
... A recurrent finding is a falling exchange-rate pass-through over time until recently, in line with our result that lower inflation volatility is associated with less frequent price adjustments. Amiti et al. (2019) and Muehlegger and Sweeney (2022) consider cost shocks more broadly and find strong strategic complementarities in price setting, an essential element in our explanation of the role of CPI inflation volatility in price setting (see above). 10 In a similar vein, using surveys, Blinder et al. (1998) and Fabiani et al. (2005) find that firms hesitate to change prices due to the fear of losing customers to competitors. The importance of competitor's prices is further underlined by Dedola et al. (2022), who, employing micro data, ascertain that the pass-through of import cost shocks is lower for larger firms than for smaller ones, suggesting a role for strategic complementarities. ...
... Much of the existing literature on the pass-through of taxes focus on the role of competition (or lack thereof) and on the presence (or absence) of horizontal market concentration (Myles, 1989;Fullerton and Metcalf, 2002;Muehlegger and Sweeney, 2021). The general consensus for the case of imperfectly competitive markets is that the more (horizontally) concentrated the market is, the greater the pass-through of taxes on consumer prices is. 1 This result has been tested in different industries, including the alcohol industry (Shrestha and Markowitz, 2016), the transportation fuel industry (Doyle and Samphantharak, 2008;Kopczuk et al., 2016) and the cigarette industry (Delipalla and O'Donnell, 2001). ...
A large body of literature has examined the impact of the horizontal market structure on the tax incidence on consumers. However, the extent to which the vertical market structure affects the tax pass-through —which might be particularly relevant in the presence of the double marginalisation problem— is an unexplored question. Using a confidential dataset of gas station contracts with a major Spanish refiner, in combination with their retail fuel prices and characteristics, we document that the pass-through of a tax onto prices is about 38 percent higher in vertically-integrated gas stations than in independent ones. Our estimates allow us to assess the impact on government revenue and emissions under different counterfactual market scenarios.
... To estimate these elasticities, it uses regression analysis to measure the impact of energy costs on manufacturing output using aggregate publicly available data. The cost variation used in the analysis is related to Ganapati et al. (2020) and Muehlegger and Sweeney (2017), exploiting the fact that different industries located in different areas face different cost shocks with the fracking boom. Crucially, the fracking boom also generates differences between domestic and foreign energy costs, which are needed to identify the elasticities of output, imports, and exports needed to inform the optimal output-based subsidies. ...
... 34 We experienced this first-hand while attempting to estimate pass-through in the cement industry . For an exception that may prove the rule, see Muehlegger and Sweeney (2019). Mac-Kay et al. (2014) provide a formal treatment of econometric bias in pass-through regressions. ...
We describe the quantitative modeling techniques that are used in horizontal merger review for the evaluation of unilateral effects, and discuss how the 2010 Horizontal Merger Guidelines helped legitimize these methods and motivate scholarly research. We cover markets that feature differentiated products pricing, auctions and negotiations, and homogeneous products, in turn. We also develop connections between quantitative modeling and market concentration screens that are based on the Herfindahl-Hirschman Index (HHI).
We examine how regional cost shocks are passed through into the prices of globally traded energy‐intensive commodities. We find that the pass‐through of local costs is influenced by production capacity in the short run. When capacity constraints become binding, the pass‐through of cost shocks to the constrained region diminishes to zero. Our application to the market for ammonia, a commodity largely produced from natural gas, demonstrates the significance of capacity constraints and international market linkages for empirical pass‐through models.
When reviewing horizontal mergers, antitrust agencies balance anticompetitive incentives, resulting from market power, with procompetitive incentives, created by efficiencies, assuming complete information and static, simultaneous move Nash equilibrium play. These models miss how a merged firm may prefer not to pass through efficiencies when rivals would respond by lowering their prices. We use an asymmetric information model, where rivals do not observe the size of the realized cost efficiency, to investigate how this incentive could affect post‐merger prices. We highlight how the strength of this incentive will depend on the market structure of non‐merging rivals and discuss alternative settings where similar issues arise.
The incomplete pass-through of exchange rates to prices is a well-documented phenomenon. Firms respond optimally to exchange rate shocks by adjusting margins and buying inputs from regions with more advantageous terms of trade. Consumers, in turn, substitute goods that become more expensive for relatively cheaper goods after an exchange rate shock. We use data from the market for new cars in Colombia to empirically analyze the determinants of incomplete pass-through after a large depreciation of the local currency. We estimate a structural oligopoly model that nests the optimal reactions of firms and consumers to assess their relative importance in explaining the lack of response of retail prices to the exchange rate shock. We find that, in relative terms, the most important factor explaining incomplete pass-through is consumer substitution, followed by strategic interaction between sellers.
p>We study the pass-through of Canada’s Nutrition North food subsidy in remote, mainly Indigenous communities with limited competition. Reforms to the program in 2016 and 2019 provide exogenous changes in retailer marginal costs and we show that on average, retail prices were lowered by 67 cents for every additional dollar of subsidy, well below the full pass-through expected under perfect competition. We can precisely characterize the competitive environment for each community, which is typically a retail monopoly or duopoly, and find that the low average pass-through is mostly driven by monopoly communities. Ourfindingsshowthatresourcesintendedformarginalizedcommunitiescanbe partly captured by local firms with market power.
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Economists have widely endorsed pricing CO2 emissions to internalize climate changerelated externalities. Doing so would significantly affect coal, the most carbon-intensive energy source. However, U.S. coal markets exhibit an additional distortion: the railroads that transport coal to power plants can exert market power. This paper estimates how coal-by-rail markups respond to changes in coal demand. I identify markups in a major intermediate goods market using both reduced-form and structural methods. I find that rail carriers reduce coal markups when downstream power plant demand changes due to a drop in the price of natural gas (a competing fuel). My results imply that decreases in coal markups have increased recent U.S. climate damages by $11.9 billion, compared to a counterfactual where markups did not change. Incomplete passthrough would likely erode the environmental benefits of an incremental carbon tax, shifting the tax burden towards upstream railroads. Still, a non-trivial tax would likely increase welfare.
This paper provides a comprehensive framework to study welfare effects of multiple policy interventions and other external changes under imperfect competition with emphasis on specific and ad valorem taxation as a leading case. Specifically, in relation to tax pass-through, we provide “sufficient statistics” formulas for two welfare measures under a fairly general class of demand, production cost, and market competition. The measures are (i) marginal value of public funds (i.e., the marginal change in consumer and producer surplus relative to an increase in the net cost to the government), and (ii) incidence (i.e., the ratio of a marginal change in consumer surplus to a marginal change in producer surplus). We begin with the case of symmetric firms facing both unit and ad valorem taxes to derive a simple and empirically relevant set of formulas. Then, we provide a substantial generalization of these results to encompass firm heterogeneity by using the idea of tax revenue that is specified as a general function parameterized by a vector of policy instruments including government and non-government interventions and costs other than taxation.
AFEP released its report “Trade & Climate Change: Quantitative Assessment of the Best Policy Tools to Achieve Climate Neutrality and Competitiveness”. It is the first study providing a comparative and quantitative analysis on the Carbon Border Adjustment Mechanism and other trade policy tools. It addresses the following questions: Best CBAM design: what does CBAM mean? What is the best CBAM design to achieve both carbon emission curbs and reduction of carbon leakage? Comparative approach: can CBAM better perform than other taxation tools and/or other trade instruments? One tool or a more comprehensive approach: should the EU rely mostly on one instrument or also invest in a set of trade negotiations to maximise climate and economic benefits? The main recommendation is that a tax-based (or ETS separate market for imports) CBAM is clearly a better performing tool than other internal instruments, such as a final consumption tax, if it comes along with strong supportive measures, such as WTO-compatible subsidies, that would help EU companies to be protected from carbon leakage. At the same time, CBAM results would be significantly boosted if this tool would be combined with international trade agreements with a « green » impact: for instance, a revised Agreement on industrial subsidies and an agreement reducing tariff duties on low carbon and environmental goods.
In this paper, we examine executive compensation data from 78 major U.S. oil and gas companies over a 24-year period. Perhaps in no other industry are the fortunes of so many executives so dependent on a single global commodity price. We find that a 10% increase in oil prices is associated with a 2% increase in executive compensation. This oil price effect holds for both CEOs and non-CEOs and separately for several different individual components of compensation, including bonuses.
We find that the oil price effect is larger in companies with more insiders on the board, and asymmetric, with executive compensation rising with increasing oil prices more than it falls with decreasing oil prices. We then discuss potential mechanisms drawn from the broader existing literature on executive compensation.
Bartik reviews evidence on whether state and local policies affect job growth. He then presents empirical data supporting the intentions of such programs, showing that job growth may lead to a number of positive long-term effects including: lower unemployment, higher labor force participation, higher real estate values, and better occupational opportunities. He also shows that the earnings gains to disadvantaged groups outweigh the resulting increased real estate values for property owners, and concludes by saying that regional competition for jobs may actually be a benefit for the nation as a whole.
The stickiness and currency of pricing of traded goods play a central role in international macroeconomics; however, empirical
evidence on these features is seriously limited. To address this, we use micro data on U.S. import and export prices at the
dock for the period 1994–2005 and present four main results: First, the median price duration in the currency of pricing is
10.6 (12.8) months for imports (exports). Second, 90% (97%) of imports (exports) are priced in dollars. Consequently, contrary
to standard modeling assumptions, for the United States, there is producer currency pricing in exports and local currency
pricing in imports. Third, import price rigidity has increased by ten percentage points, with increasing rigidity in differentiated
goods prices. Fourth, even conditioning on a price change, exchange rate pass-through into U.S. import prices is low, at 22%.
We test and confirm that retail gasoline prices respond more quickly to increases than to decreases in crude oil prices. Among
the possible sources of this asymmetry are production/inventory adjustment lags and market power of some sellers. By analyzing
price transmission at different points in the distribution chain, we attempt to shed light on these theories. Spot prices
for generic gasoline show asymmetry in responding to crude oil price changes, which may reflect inventory adjustment effects.
Asymmetry also appears in the response of retail prices to wholesale price changes, possibly indicating short-run market power
among retailers.
This paper disentangles fluctuations in disaggregated prices due to macroeconomic and sectoral conditions using a factor-augmented vector autoregression estimated on a large data set. On the basis of this estimation, we establish eight facts: (1) Macroeconomic shocks explain only about 15% of sectoral inflation fluctuations; (2) The persistence of sectoral inflation is driven by macroeconomic factors; (3) While disaggregated prices respond quickly to sector-specific shocks, their responses to aggregate shocks are small on impact and larger thereafter; (4) Most prices respond with a significant delay to identified monetary policy shocks, and show little evidence of a "price puzzle," contrary to existing studies based on traditional VARs; (5) Categories in which consumer prices fall the most following a monetary policy shock tend to be those in which quantities consumed fall the least; (6) The observed dispersion in the reaction of producer prices is relatively well explained by the degree of market power; (7) Prices in sectors with volatile idiosyncratic shocks react rapidly to aggregate monetary policy shocks; (8) The sector-specific components of prices and quantities move in opposite directions.
We study inference in shift-share regression designs, such as when a regional outcome is regressed on a weighted average of sectoral shocks, using regional sector shares as weights. We conduct a placebo exercise in which we estimate the effect of a shift-share regressor constructed with randomly generated sectoral shocks on actual labor market outcomes across U.S. commuting zones. Tests based on commonly used standard errors with 5% nominal significance level reject the null of no effect in up to 55% of the placebo samples. We use a stylized economic model to show that this overrejection problem arises because regression residuals are correlated across regions with similar sectoral shares, independent of their geographic location. We derive novel inference methods that are valid under arbitrary cross-regional correlation in the regression residuals. We show using popular applications of shift-share designs that our methods may lead to substantially wider confidence intervals in practice.
After decades of supporting free trade, in 2018 the United States raised import tariffs and major trade partners retaliated. We analyze the short-run impact of this return to protectionism on the U.S. economy. Import and retaliatory tariffs caused large declines in imports and exports. Prices of imports targeted by tariffs did not fall, implying complete pass-through of tariffs to duty-inclusive prices. The resulting losses to U.S. consumers and firms that buy imports was 7.2 billion, or 0.04% of GDP. Import tariffs favored sectors concentrated in politically competitive counties, and the model implies that tradeable-sector workers in heavily Republican counties were the most negatively affected due to the retaliatory tariffs. JEL Code: F1.
How strong are strategic complementarities in price setting across firms? In this article, we provide a direct empirical estimate of firms’ price responses to changes in competitor prices. We develop a general theoretical framework and an empirical identification strategy, taking advantage of a new micro-level dataset for the Belgian manufacturing sector. We find strong evidence of strategic complementarities, with a typical firm adjusting its price with an elasticity of 0.4 in response to its competitors’ price changes and with an elasticity of 0.6 in response to its own cost shocks. Furthermore, we find evidence of substantial heterogeneity in these elasticities across firms. Small firms exhibit no strategic complementarities in price setting and complete cost pass-through. In contrast, large firms exhibit strong strategic complementarities, responding to both competitor price changes and their own cost shocks with roughly equal elasticities of around 0.5. We show that this pattern of heterogeneity in markup variability across firms is important for explaining the aggregate markup response to international shocks and the observed low exchange rate pass-through into domestic prices.
The Bartik instrument is formed by interacting local industry shares and national industry growth rates. We show that the typical use of a Bartik instrument assumes a pooled exposure research design, where the shares measure differential exposure to common shocks, and identification is based on exogeneity of the shares. Next, we show how the Bartik instrument weights each of the exposure designs. Finally, we discuss how to assess the plausibility of the research design. We illustrate our results through two applications: estimating the elasticity of labor supply, and estimating the elasticity of substitution between immigrants and natives. (JEL C51, F14, J15, J22, L60, R23, R32)
We examine conventional approaches to evaluating the economic impact of protectionist trade policies. We illustrate these conventional approaches by applying them to the tariffs introduced by the Trump administration during 2018. In the wake of this increase in trade protection, the United States experienced substantial increases in the prices of intermediates and final goods, dramatic changes to its supply-chain network, reductions in availability of imported varieties, and the complete pass-through of the tariffs into domestic prices of imported goods. Therefore, the full incidence of the tariffs has fallen on domestic consumers and importers so far, and our estimates imply a reduction in aggregate US real income of $1.4 billion per month by the end of 2018. We see similar patterns for foreign countries that have retaliated with their own tariffs against the United States, which suggests that the trade war has also reduced the real income of these other countries.
The US Renewable Fuel Standard (RFS) requires blending increasing quantities of biofuels into the surface vehicle fuel supply. The RFS requirements are met through a system of tradable permits called Renewable (fuel) Identification Numbers, or RINs. We exploit the large fluctuations in RIN prices during 2013–15 to estimate the pass-through of RIN prices to US wholesale and retail fuel prices. We control for common factors by examining spreads of physically similar fuels with different RIN obligations. Pooling six different wholesale petroleum fuel spreads, we estimate a pooled long-run or equilibrium pass-through coefficient of 1.00 with a standard error of 0.11. This pass-through occurs within two business days. The only fuel for which we find economically and statistically significant failure of pass-through is retail E85, which contains up to 83% ethanol; the pass-through of RIN prices to the retail E85–E10 spread is precisely estimated to be close to zero. Keywords: E85; Energy prices; Fuels markers; RBOB; Retail fuel spreads; Wholesale fuel spreads
The Renewable Fuel Standard (RFS) is among the largest renewable energy mandates in the world. The policy is enforced using tradeable credits that implicitly subsidize biofuels and tax fossil fuels. The RFS relies on these taxes and subsidies to be passed through to consumers to stimulate demand for biofuels and decrease demand for gasoline and diesel. We study pass-through of the RFS subsidy for E85, a high-ethanol blend fuel, to retail fuel prices using weekly prices from over 450 fuel stations in the United States. We find that, on average, half to three-quarters of the E85 subsidy is passed through to consumers. However, pass-through takes 6–8 weeks, and station-level pass-through rates exhibit substantial heterogeneity, with the retailers’ market structure influencing both the speed and level of pass-through. © 2019 by The Association of Environmental and Resource Economists.
We show that supply-side financial shocks have a large impact on firms’ investment. We develop a new methodology to separate firm borrowing shocks from bank supply shocks using a vast sample of matched bank-firm lending data. We decompose aggregate loan movements in Japan for the period 1990–2010 into bank, firm, industry, and common shocks. The high degree of financial institution concentration means that individual banks are large relative to the size of the economy, which creates a role for granular shocks as in Gabaix’s (2011) study. We show that idiosyncratic granular bank supply shocks explain 30–40 percent of aggregate loan and investment fluctuations.
We estimate pass-through with 30 years of data from the portland cement industry. Robust econometric evidence supports that fuel cost changes are more than fully transmitted downstream in the form of price changes. This validates an implicit pass-through assumption made in recent academic research and regulatory analyses. We combine the econometric results with estimates of competitive conduct obtained from the literature to evaluate the incidence of market-based CO2 regulation. Producers bear roughly 11% of the regulatory burden and could be compensated with 16% of the revenues obtained.
This paper shows that in theory and BLS microdata, the prices of imported goods respond to the exchange rates (ER) of the producer’s foreign competitors. In contrast, standard models have no role for competitors’ ERs. Excluding the effects of competitors’ exchange rates typically biases upwards estimates of bilateral exchange rate pass-through because competitors’ ER and bilateral ERs are positively correlated. A multi-country version of Atkeson and Burstein’s (2008) industry aggregation model is able to explain a sizable proportion of pass-through of competitors’ exchange rates to import prices, and also predicts pass-through of foreign competitors’ prices and pass-through of competitors’ ERs to US producer prices — both of which are supported in the data. The results suggest that pass-through will be larger for ER movements shared by a greater fraction of foreign competitor countries.
Governments contract with private firms to provide a wide range of services. While a large body of previous work has estimated the effects of that contracting, surprisingly little has investigated how those effects vary with the generosity of the contract. In this paper we examine this issue in the Medicare Advantage (MA) program, through which the federal government contracts with private insurers to coordinate and finance health care for 17 million Medicare recipients. To do this, we exploit a substantial policy-induced increase in MA reimbursement in metropolitan areas with a population of 250,000 or more relative to MSAs below this threshold. Our results demonstrate that the additional reimbursement leads more private firms to enter this market and to an increase in the share of Medicare recipients enrolled in MA plans. Our findings also reveal that about one-eighth of the additional reimbursement is passed through to consumers in the form of better coverage. A somewhat larger share accrues to private insurers in the form of higher profits and we find suggestive evidence of a large impact on advertising expenditures. Our results have implications for a key feature of the Affordable Care Act that will reduce reimbursement to MA plans by $156 billion from 2013 to 2022.
We use micro data on Irish producer prices to provide clean evidence on pricing-to-market across a broad range of manufacturing
sectors. We have monthly observations on prices charged by the same plant for the same product to buyers in Ireland and the
UK, two markets segmented by variable exchange rates. Assuming that relative marginal cost is constant across markets within
a plant and a product, this allows us to observe the behaviour of the markup in the UK market relative to the home market.
To identify pricing-to-market that goes beyond what is mechanically due to price stickiness, we condition on episodes where
prices change. When prices are invoiced in local currency, conditional on prices changing, the ratio of the markup in the
foreign market to the markup in the home market increases one-for-one with depreciations of home against foreign currency
and decreases one-for-one with appreciations of home against foreign currency, a very particular form of pricing-to-market.
This paper presents a new model of Bertrand competition between heterogeneous firms in the open economy where the macroeconomic distribution of markups responds to the degree of trade openness and the underlying level of technology in each trading partner. The model's simple closed-form distributions for markups and pricing yield predictions that coincide with a number of stylized facts from the empirical literature on markups, pass-through, and trade openness which previously could be illustrated only through numerical simulations. (JEL D43, F12, F41, L13).
We measure the pass-through of emissions costs to electricity prices. We perform both reduced-form and structural estimations based on optimal bidding in this market. Using rich micro-level data, we estimate the channels affecting pass-through in a flexible manner, with minimal functional form assumptions. Contrary to many studies in the general pass-through literature, we find that emissions costs are almost fully passed through to electricity prices. Since electricity is traded through high-frequency auctions for highly inelastic demand, firms have weak incentives to adjust markups after the cost shock. Furthermore, the costs of price adjustment are small.
We show that, in general, consistent estimates of cost pass-through are not obtained from reduced-form regressions of price on cost. We derive a formal approximation for the bias that arises even under standard orthogonality conditions. We provide guidance on the conditions under which bias may frustrate inference.
In this paper, we study the effect of market structure on price-setting
through the lens of exchange rate pass-through. We first document that two
predictions of the heterogeneous firm version of the Dornbusch (1987)
pricing model are confirmed in micro data on US import prices: while the
rate at which a firm reacts to changes in its own cost is U-shaped in market
share, the rate at which it reacts to competitors' prices is hump-shaped in
market share. Second, using this theory as a guidance, we present an
expression for price changes in industry equilibrium that can be broken down
into a component due to the direct cost response at the firm level, and
another one due to price complementarities faced by the firm at the industry
level. We show empirically that taking into account a sector's market
structure and the interplay of heterogeneity in reaction to own cost and
reaction to the competition can substantially improve our understanding of
the variation in pass-through rates across sectors and trade partners. The
direct cost pass-through channel and the indirect price
complementarity channel play approximately equally important roles in
determining pass-through but partly offset each other. Omission of either
channel in an empirical analysis results in a failure to explain how market
structure affects price-setting in industry equilibrium.
We use policy discontinuities at state borders to identify the effects of minimum wages on earnings and employment in restaurants and other low-wage sectors. Our approach generalizes the case study method by considering all local differences in minimum wage policies between 1990 and 2006. We compare all contiguous county pairs in the United States that straddle a state border and find no adverse employment effects. We show that traditional approaches that do not account for local economic conditions tend to produce spurious negative effects due to spatial heterogeneities in employment trends that are unrelated to minimum wage policies. Our findings are robust to allowing for long-term effects of minimum wage changes. (c) 2010 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Several authors have studied the impact of a marginal cost variation in the Cournot model on consumers' surplus, firms' profits and social welfare. We unify and extend the results when all marginal costs change simultaneously. Hence, we bring together two strands of literature, respectively, on mean-preserving and subgroup common shocks. The effect of any shock is decomposed into two parts: an average impact (AI) and a heterogeneity effect (HE). The former improves welfare if the inverse demand function is concave enough and the market is concentrated enough, the latter when the diffusion of the shock is negatively correlated with the market share distribution. Finally, we apply our decomposition to various special cases.
The 1990 Clean Air Act Amendments stipulated gasoline content requirements for metropolitan areas with air pollution levels above predetermined federal thresholds. The legislation led to exogenous changes in the type of gasoline required for sale across US metropolitan areas. This paper uses a panel of detailed wholesale gasoline price data to estimate the effect of gasoline content regulation on wholesale prices and price volatility. We investigate the extent to which the estimated price effects are driven by changes in the number of suppliers versus geographic segmentation resulting from regulation. We find that prices in regulated metropolitan areas increase significantly, relative to a control group, by an average of 3 cents/gal. The price effect, however, varies by 8 cents/gal across regulated markets and the heterogeneity across markets is correlated with the degree of geographic isolation generated by the discontinuous regulatory requirements.
In the median sector, 100 percent of the long-run response of the sectoral price index to a sector-specific shock occurs in the month of the shock. The standard Calvo model and the standard sticky-information model can match this finding only under extreme assumptions concerning the profit-maximizing price. The rational-inattention model of Maćkowiak and Wiederholt [2009a. Optimal sticky prices under rational inattention. American Economic Review 99, 769–803] can match this finding without an extreme assumption concerning the profit-maximizing price. Furthermore, there is little variation across sectors in the speed of response of sectoral price indexes to sector-specific shocks. The rational-inattention model matches this finding, while the Calvo model predicts too much cross-sectional variation.
In this paper, we provide new evidence regarding the pass-through of diesel and gasoline taxes to prices, and how the estimated pass-through depends on a variety of supply conditions including a measure of state residual supply elasticity, and refinery and inventory constraints. In addition, we estimate the response of tax incidence to gasoline content regulations, which complicate the supply chain by increasing product heterogeneity. We find that state gasoline and diesel taxes are on average fully passed on to consumers. We also find that the pass-through of diesel taxes is greater in settings where untaxed uses of diesel are more important, which corresponds to times when residual supply is more elastic. We find that only half of the state diesel tax is passed on to consumers when U.S. refinery capacity utilization is above 95 percent. Gasoline taxes, on the other hand, are fully passed through regardless of season or capacity utilization, indicating that a gas tax holiday would provide price relief to consumers. We find that regional gasoline content regulations affect pass-through – we estimate tax pass-through is 22 percentage points lower in a state using two blends of gasoline than a state using one blend of gasoline.
This paper calculates indices of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indices for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political autonomy of the central banks in emerging market and developing countries. Our analysis confirms that greater CBA has on average helped to maintain low inflation levels. The paper identifies four broad principles of CBA that have been shared by the majority of countries. Significant differences exist in the area of banking supervision where many central banks have retained a key role. Finally, we discuss the sequencing of reforms to separate the conduct of monetary and fiscal policies. IMF Staff Papers (2009) 56, 263–296. doi:10.1057/imfsp.2008.25; published online 23 September 2008
This paper evaluates a pilot program run by a company called OPOWER, previously known as Positive Energy, to mail home energy reports to residential utility consumers. The reports compare a household’s energy use to that of its neighbors and provide energy conservation tips. Using data from randomized natural field experiment at 80,000 treatment and control households in Minnesota, I estimate that the monthly program reduces energy consumption by 1.9 to 2.0 percent relative to baseline. In a treatment arm receiving reports each quarter, the effects decay in the months between letters and again increase upon receipt of the next letter. This suggests either that the energy conservation information is not useful across seasons or, perhaps more interestingly, that consumers’ motivation or attention is malleable and non-durable. I show that “profiling,” or using a statistical decision rule to target the program at households whose observable characteristics suggest larger treatment effects, could substantially improve cost effectiveness in future programs. The effects of this program provide additional evidence that non-price “nudges” can substantially affect consumer behavior.
This paper examines empirically the relationship between vertical integration and wholesale gasoline prices. We use discrete and differential changes in the extent of vertical integration generated by mergers in West Coast gasoline refining and retailing markets to test for incentives to raise rivals' costs. The research design allows us to test for a relationship between vertical integration and wholesale prices, controlling for horizontal market structure, cost shocks and trends. We find evidence consistent with the strategic incentive to raise competitors' input costs. This suggests that vertical integration can have a significant impact on wholesale prices. Copyright Blackwell Publishing Ltd. 2005.
There are surprisingly few estimates of the effects of sales taxes on retail prices, especially at the firm level. We consider the temporary suspension, and subsequent reinstatement, of the gasoline sales tax in Illinois and Indiana following a price spike in 2000. Earlier laws set the timing of the reinstatements, providing plausibly exogenous changes in the tax rates. Using a unique dataset of daily prices at the gas-station level, 70% of the tax suspension is passed on to consumers in the form of lower prices, while 80-100% of the tax reinstatements are passed on to consumers. Some evidence suggests that these short-run pass-through estimates are smaller near the state borders, with the tax reinstatements associated with relatively higher prices up to an hour's drive into neighboring states.
Who Bears the Burden of Energy Taxes? The Role of Local Pass-Through
- Stolper
Pass-Through as an Economic Tool: Principles of Incidence under Imperfect Competition
- Weyl
Global versus Local Shocks in Micro Price Dynamics,
- Andrade
What Do Emissions Markets Deliver and to Whom? Evidence from Southern California's NOx Trading Program
- Fowlie
Using Cost Pass-Through to Calibrate Demand
- Miller
Accounting for Incomplete Pass-Through
- Nakamura