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Pass-Through as a Test for Market Power: An Application to Solar Subsidies

Jacquelyn Pless, Arthur A. van Benthem

NBER Working Paper No. 23260
Issued in March 2017, Revised in November 2018
NBER Program(s):Environment and Energy Economics, Public Economics

We formalize pass-through over-shifting as a simple yet under-utilized test for market power. We apply this test in the market for solar energy. Specifically, we estimate the pass-through of solar subsidies to solar system prices using rich micro-level transaction and subsidy data from California. Buyers of solar systems capture nearly the full subsidy, while there is more-than- complete pass-through to lessees. We conclude that solar markets are imperfectly competitive by ruling out alternative explanations for over-shifting, and reinforce this conclusion with a test of solar demand curvature. This procedure can serve to detect market power beyond the solar market.

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Document Object Identifier (DOI): 10.3386/w23260

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