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Pass-Through of Own and Rival Cost Shocks: Evidence from the U.S. Fracking Boom

Erich Muehlegger, Richard L. Sweeney

NBER Working Paper No. 24025
Issued in November 2017, Revised in October 2019
NBER Program(s):Environment and Energy Program

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.

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Document Object Identifier (DOI): 10.3386/w24025

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