Working Paper: NBER ID: w24025
Authors: Erich Muehlegger; Richard L. Sweeney
Abstract: 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.
Keywords: Passthrough; Cost Shocks; Fracking Boom; Oligopoly; Carbon Tax
JEL Codes: H22; H23; Q40; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm-specific cost shocks (D21) | firm's price increase (L11) |
| industry-wide cost shocks (L11) | firm's price increase (L11) |
| rival costs (L13) | firm's passthrough rates (H32) |
| own costs + rival costs (D43) | firm's passthrough rates (H32) |
| rival costs (L13) | control groups validity (C90) |