Pass-Through as a Test for Market Power: An Application to Solar Subsidies
54 Pages Posted: 20 Mar 2017 Last revised: 21 Jan 2022
Date Written: March 2017
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.
Suggested Citation: Suggested Citation