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

Jul 2018 | 212

Authors: Jacquelyn Pless, Arthur A. van Benthem

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. Speci cally, 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

JEL Codes: H22, Q42, Q48, Q58

Keywords: solar subsidy, pass-through, over-shifting, demand curvature, market power, third-

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