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Heterogeneous Impacts of Cost Shocks, Strategic Bidding, and Pass-Through: Evidence from the New England Electricity Market

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  • Harim Kim

Abstract

Industry-wide shocks can have heterogeneous impacts on firms' costs due to different firm characteristics. The heterogeneity of these impacts is crucial for understanding the pass-through of the shock because of its implications for strategic competition. In the context of the gas price shock in the electricity market, I develop a method to identify the heterogeneous impacts of the shock and show, with a structural analysis, that the heterogeneous feature of the shock induces markup adjustments in firms. Pass-through that is estimated without incorporating the existing heterogeneous impacts fails to reflect the change in competition arising from the shock and is, on average, underestimated.

Suggested Citation

  • Harim Kim, 2022. "Heterogeneous Impacts of Cost Shocks, Strategic Bidding, and Pass-Through: Evidence from the New England Electricity Market," American Economic Journal: Microeconomics, American Economic Association, vol. 14(2), pages 370-407, May.
    • Handle: RePEc:aea:aejmic:v:14:y:2022:i:2:p:370-407
    DOI: 10.1257/mic.20190367
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    Cited by:

    1. Marks, Levi & Mason, Charles & Mohlin, Kristina & Zaragoza-Watkins, Matthew, 2017. "Vertical Market Power in Interconnected Natural Gas and Electricity Markets," RFF Working Paper Series 17-27, Resources for the Future.

    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy
    • Q35 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Hydrocarbon Resources

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