DP11908 Pass-Through as a Test for Market Power: An Application to Solar Subsidies

Author(s): Jacquelyn Pless, Arthur Van Benthem
Publication Date: March 2017
Date Revised: November 2018
Keyword(s): buy vs. lease, demand curvature, market power, over-shifting, Pass-Through, solar subsidy, third-party ownership
JEL(s): H22, Q42, Q48, Q58
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11908

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.