Discussion Paper Details

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

Author(s): Jacquelyn Pless and Arthur Van Benthem

Publication Date: March 2017

Keyword(s): buy vs. lease, demand curvature, market power, over-shifting, Pass-Through, solar subsidy and third-party ownership

Programme Area(s): Public Economics

Abstract: 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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Bibliographic Reference

Pless, J and Van Benthem, A. 2017. 'Pass-Through as a Test for Market Power: An Application to Solar Subsidies'. London, Centre for Economic Policy Research.