Cost Pass-through Research Articles

Prices, markups and wages: inflation and its distributive consequences in Spain, 2021-2023

This article analyses the recent inflationary experience in Spain (2021-2023), focusing on the functional income distribution, the evolution of markups and real wages, and the economic policies implemented. We rely on the conflict theory of inflation and touch upon recent debates on of sellers' inflation. Using the Observatory of Firms’ Margins, we confirm an increase in aggregate markups. Nevertheless, the main factor explaining price increases is firms' pass-through of higher input costs to protect their profits. The direct effect of markup increases has been quantitatively less important, and that of unit labour costs negligible. Therefore, inflation has had huge distributional consequences and there is space for non-inflationary wage increases. While fiscal and regulatory measures have effectively curbed the inflation rate having an expansive effect, restrictive monetary policy is inappropriate and costly.

Carbon pricing under electricity market constraints: analyzing rent management dynamics in the Republic of Korea

ABSTRACT How do policymakers manage the tension between enforcing a carbon price and ensuring low-cost electricity provision? This paper answers this question in two steps. First, it combines literature on electricity market design and rent management to arrive at a novel analytical framework. Carbon pricing can disrupt longstanding rent transfers between the state and electricity consumers by making it more expensive to produce and/or consume fossil fuel-based electricity. We theorize that policymakers respond to this dilemma by making incremental policy design adjustments to gradually enforce rent losses across the electricity production value chain. We apply this framework to study the implementation of the Korean emissions trading scheme (ETS) policy 2015–2022. Drawing on 20 expert interviews and policy documents we identify an initial sequence of policy design adjustments which enable, but also delay, the enforcement of the carbon price signal in the electricity system. This incremental and politically contentious process reduces the ETS policy’s ability to abate greenhouse gas emissions from the Korean electricity sector in the short term. The findings suggest that the effectiveness of carbon pricing in the electricity sector hinge on the parallel construction of supportive institutions to permit meaningful carbon cost pass-through.

Nonlinear input cost pass-through to consumer prices: a threshold approach

ABSTRACT This paper examines a possible nonlinearity in the pass-through to consumer price index (CPI) inflation of increases in firms’ input costs. Extending the existing econometric framework, we propose a threshold model with multiple cost variables and unknown thresholds. An empirical analysis shows that the proposed model is favoured over a linear one and existing threshold models in terms of in-sample model fit. The empirical results indicate that the linear model risks underestimating the degree of the pass-through of an input-cost increase that exceeds the threshold.

Collusion and Price Behavior in the U.S. Pork Industry

Abstract This research analyzes the U.S. pork industry dynamics in light of the alleged output price-fixing cartel of the largest pork processors revealed in the antitrust lawsuits filed by pork buyers beginning in 2018. The empirical evidence may suggest that pork production, the farm, wholesale, and retail values of pork, and marketing margins increased, but the farm sector share decreased in the cartel period (2009–2019), as compared with the pre-cartel period (1998–2008). The wholesale pork pricing by pork processors is consistent with oligopoly pricing in both the pre-cartel and cartel periods. While the estimated decrease in cost pass-through between these two periods may reflect an increase in the seller (oligopoly) market power of pork processors in the cartel period, this cost pass-through decrease is not statistically significant from zero. The retail pork pricing by food retailers is consistent with perfectly competitive pricing in both the pre-cartel and cartel periods.

A Single-Buyer Model of Imbalance Cost Pass-Through Pricing Forecasting in the Malaysian Electricity Supply Industry

The imbalance cost pass-through (ICPT) is a flexible component of the incentive-based regulation (IBR) that empowers power producers to adjust tariffs in response to variable fuel prices, thereby enhancing the economic resilience of electricity generation. In Malaysia, the Energy Commission has conducted biannual reviews of fuel and other generation costs. Any cost savings or increases identified during these reviews will be passed on to customers in the form of rebates or surcharges. Meanwhile, if an increment in the ICPT price signal can be provided to electricity providers and consumers, early preparation for operation budgeting can be realised, and energy management program development can be properly prepared. Due to this reason, this study proposes ICPT price forecasting for the electricity market in Peninsular Malaysia that will benefit the stakeholders. The study aims to construct an ICPT-related baseline model for the peninsular generation data by employing three forecasting methods. The forecasting performance is analysed using the mean absolute percentage error (MAPE). In light of our findings, the ARIMA method is one of the most accurate forecasting methods for fuel prices compared to the moving average (MA) and LSSVM methods. The observed price differences between the ARIMA and LSSVM models for ICPT are minimal. The ICPT price for July–December 2022 and January–June 2023 is MYR 0.21/kWh for the ARIMA and MYR 0.18/kWh for LSSVM, which are close to the actual TNB’s ICPT tariff. As for forecasting, the ICPT price is expected to drop in the next announcement. The findings of this study may have a positive impact on the sustainability of the energy sector in Malaysia.

Impact of supply risk on cost pass-through

ABSTRACT We study the cost pass-through rate in a supply chain setting where a buying firm sources from either a single unreliable supplier or dual unreliable suppliers. Numerous papers studying cost pass-through rates have assumed that supply is always certain and ample, which is not usually the case in practice. We find that the cost pass-through rate should depend on the supply uncertainty, its risk-sharing levels with upstream suppliers, and different sourcing strategies. In particular, the cost pass-through rate increases in supply risk-sharing levels, but decreases under single sourcing, compared to dual sourcing.

Alternative forms of buyer power in a vertical duopoly: implications for profits, welfare, and cost pass-through

Alternative forms of buyer power in a vertical duopoly: implications for profits, welfare, and cost pass-through

A study of carbon cost pass-through rate differences in the power generation industry

In the context of the operation of China’s carbon emissions trading market, carbon cost pass-through will profoundly impact the country’s power generation industry. However, the core of studying carbon cost pass-through in the power generation industry is determining the carbon cost pass-through rate (CCPTR). Based on this, this paper first takes the Cournot model as the basic principle, which analyzes the impact of different power generation enterprises’ numbers and the characteristics of electricity market demand on the carbon pass-through results. Secondly, based on the Cournot model, this paper further CCPTR under marginal cost variability. The research results show that when the demand function is linear, the larger the CCPTR, the larger the proportion of carbon cost pass-through. When the demand function is isoelastic, the smaller the CCPTR, the smaller the proportion of carbon cost pass-through.

How does spatial dependence affect cost pass-through? Evidence from the Hungarian retail gasoline market

How does spatial dependence affect cost pass-through? Evidence from the Hungarian retail gasoline market

The Cost to Consumers of Carbon Capture and Storage—A Product Value Chain Analysis

High-cost abatement measures to mitigate greenhouse gas emissions in the basic commodity industry is known to result in substantial increases in the production costs. Consequently, investments in such measures are lagging behind what is required to make deep emission cuts in line with the Paris Agreement. As high-cost abatement measures (such as Carbon Capture and Storage; CCS) are perceived as expensive for the basic commodity producer, this study investigates the impacts down-stream of the product value chain when assuming full cost pass-through (i.e., the cost increase related to basic commodity production is fully passed on down-stream of the product chain to the end-consumer). We investigate the effects on both costs, by means of a techno-economic assessment, and carbon footprints, using a Life Cycle Assessment (LCA), along the product value chain for the case of post-combustion CCS applied to the cement, pulp, Waste-to-Energy (WtE), and refinery industries, towards abating fossil- and process-related emissions and generating negative emissions. Here, we analyse the product value chains that involve cement to a high-speed railway, pulp to a disposable baby diaper, WtE in connection with housing and plastic products, and refineries to different transportation solutions (truck transport and air-freight). The results show that even though the costs for producing basic commodities can increase significantly (200% for cement, 75% for pulp, 230% for heat, and 6–37% for refinery products) when implementing CCS, the increases in prices for end-users are marginal (1% for the railway, 3% for the disposable baby diaper, 1% for the housing, 0.4% for truck transport and 2% for air-freight). Simultaneously, the carbon footprint associated with the end-use may be reduced by up to 36% for the railway, 31% for the diaper, 80% for the housing, and 3–23% for the refinery cases.

Multiproduct Cost Pass-Through: Edgeworth’s Paradox Revisited

Previous articleNext article No AccessMultiproduct Cost Passthrough: Edgeworth's Paradox RevisitedMark Armstrong and John VickersMark Armstrong Search for more articles by this author and John Vickers Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by Journal of Political Economy Just Accepted Article DOIhttps://doi.org/10.1086/724573 Views: 41Total views on this site HistoryAccepted February 02, 2023 © 2023 The University of Chicago. All Rights reserved.PDF download Crossref reports no articles citing this article.

The role of airport costs in the post-9/11 recovery of San Francisco International Airport

This paper examines whether or to what extent San Francisco International Airport’s (SFO’s) purportedly high costs relative to other airports suppressed SFO’s traffic demand and prolonged the recovery of passenger traffic in the period after the 11th September, 2001 terrorist attacks. A comparative analysis of the historical data shows that SFO’s direct airport costs per enplanement (CPE) were higher than most other major airports in the post-9/11 period by a considerable margin, but that airport costs likely were not a significant factor in SFO’s prolonged recovery. Airport costs likely did not affect airline profitability sufficiently to influence route and scheduling decisions, and it is unlikely that passenger demand was dampened by the pass-through of higher costs to airfares. This research suggests at best a tenuous relationship between airport rates and passenger activity, and at SFO the evidence does not suggest that an extremely high CPE relative to peer airports affected the pace of its slow return to pre-9/11 traffic levels. Rather, the slow return of traffic to SFO and its neighbour, Norman Y. Mineta San Jose International Airport (SJC), compared to the robust growth at Oakland International Airport (OAK) can be explained by traditional economic means. It also suggests that in a multi-airport region where each airport is somewhat specialised, an individual airport’s over- or underperformance relative to its neighbours is more likely to be a function of economic geography than of any airport’s rate-setting practices. If this conclusion holds true for other US airports, it emphasises the ability of airports to create capital plans and set rates and charges to make long-term investments in organic air traffic growth, ensuring that new entrant airlines have sufficient facilities to begin service and that existing airlines have sufficient capacity to grow.

Regressive effects of payment card pricing and merchant cost pass-through in the United States and Canada

We use novel datasets from multiple sources to quantify US and Canadian consumers’ net pecuniary costs of making payments across income cohorts. The net costs include merchants’ payment acceptance cost that is passed on to consumers, payment card rewards, and fees paid to financial institutions. We find that the net costs as the ratio to transaction value is generally the highest for the bottom income cohort and the lowest for the top cohort, indicating regressive distributional effects. In Canada, the difference in the ratio between the bottom and top cohorts remains positive under all combinations of alternative assumptions, ranging from 0.24 percentage points (pps) to 0.85 pps. In contrast, in the US the difference ranges from -0.30 pps to 0.74 pps, suggesting that the regressive effects disappear under some combinations of alternative assumptions. Further research with more detailed data is needed to refine our results for the US.

Drivers and pass-through of the EU ETS price: Evidence from the power sector

Despite low and volatile allowance prices observed between 2008 and 2018 within the European Union (EU) Emission Trading System (ETS), power generators’ responses were by and large consistent with predictions of economic theory. We infer this in a number of steps. First by establishing that the qualitative response of the EU ETS allowance price to variations in the pre-eminent drivers of short-term fuel-switching, both the gas and coal price, is as economic theory prescribes. Second, we decompose allowance price returns and impute that allowance banking had value in helping generators smooth compliance costs. Third, we show that pass-through of allowance costs was (more than) complete in seven major European markets for both coal- and gas- fired power generation. Our inference on pass-through is novel in that we impute allowance cost pass-through by dispatch technology even when the merit-order curve is unobserved. Put together, our findings imply that even prior to the recent reform-induced price appreciation, the EU ETS was more functional than many observers recognized.

Effectiveness of CO2 cost pass-through to electricity prices under “electricity-carbon” market coupling in China

This paper analyzed the coupling relationship between the carbon market and power market and constructed a threshold regression model of carbon cost pass-through to electricity prices. Furthermore, a system dynamics model was built based on “electricity-carbon” market. The results show that first, the carbon market and power market operate independently but are interrelated. The two markets will work when Chinese emission allowances and carbon prices are effectively connected with carbon emissions and electricity prices. Second, because the electricity price formation mechanism is mainly regulated by China's government, the carbon price has a significant negative effect on the electricity price since the operation of the national carbon trading system. There is no obvious linkage effect between the CO2 cost and electricity price. Third, under the current policies and market mechanism, the carbon price will experience the process of “remain low-rapid rise-remain high”. The carbon price will drive the on-grid price and sales price up. The allowance auction mechanism and carbon cost direct pass-through can effectively reflect CO2 cost in the electricity price. In the long term, introducing auctioning in the carbon market and reforming electricity price formation in the power sector will tap the emission reduction potential.

Pass-Through of Own and Rival Cost Shocks: Evidence from the U.S. Fracking Boom

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 U.S. oil refining industry. The pass-through of these components varies 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.

Do Two Electricity Pricing Wrongs Make a Right? Cost Recovery, Externalities, and Efficiency

Economists favor pricing pollution in part so that consumers face the full social marginal cost (SMC) of goods and services. But even absent externalities, retail electricity prices typically exceed private marginal cost, due to a utility’s need to cover average costs. Furthermore, the SMC of electricity can fluctuate widely hour-to-hour, while retail prices do not. We show that residential electricity rates exceed average SMC in most of the US, but there is large geographic and temporal variation. This finding has important implications for pass-through of pollution costs, as well as for policies promoting dynamic pricing, alternative energy, and reduced electricity consumption. (JEL D62, L94, L98, Q42, Q53)

The impacts of carbon pricing on the electricity market in Japan

To achieve carbon neutrality by 2050, Japan should speed up reducing fossil fuel reliance on production, especially for energy-intensive sectors. One way is by implementing a carbon pricing system, converting emissions from fossil fuels to costs of production and consumption. This study focuses on the correlation between the price of wholesale electricity spot market and carbon cost of nine regions in Japan through carbon cost pass-through rate. This paper applies polynomial OLS regression with degree two through machine learning technics to better fit the relationship between electricity price and demand and also applies a generalized additive model to capture the nonlinear relationship between fuel spread and carbon cost and test the robustness of estimated CPTR. The results show that Hokuriku, Kyushu, Shikoku, Tohoku, and Tokyo have a lower value carbon cost pass-through rate while Kansai, Chubu, and Chugoku have a higher rate of carbon cost pass-through. There is a special case in Hokkaido as the negative relationship between electricity price and carbon cost. Those findings are also crucial in supporting future policy adjustments.

The CO2 cost pass-through in nonlinear emission trading schemes

In this paper, we theoretically study the issues that how nonlinear structures of energy market affect CO2 costs of energy firms being passed through to energy prices in emission trading schemes. We set up oligopoly models to investigate CO2 cost pass-through under different emission right allocations, characterize analytic derivations of CO2 cost pass-through rates and then explore the connections between CO2 pass-through rates and nonlinear market structures. Our findings suggest that the CO2 cost pass-though rates are not only dependent on the elasticities of energy demand and supply, but largely determined by the convexity of demand curve and the competition intensity of energy market. More importantly, an economic curiosity (CO2 cost pass-through overshifting) is also observed in the emission trading schemes under suitable market conditions. The existence of CO2 cost pass-through overshifting provides regulators and policy makers important information that the emission trading schemes are at the risk of imperfect competition and may require further policy adjustments.

The Pass-Through of Minimum Wages into U.S. Retail Prices: Evidence from Supermarket Scanner Data

Abstract This paper estimates the pass-through of minimum wage increases into the prices of U.S. grocery and drug stores. We use high-frequency scanner data and leverage a large number of state-level increases in minimum wages between 2001 and 2012. We find that a 10% minimum wage hike translates into a 0.36% increase in the prices of grocery products. This magnitude is consistent with a full pass-through of cost increases into consumer prices. We show that price adjustments occur mostly in the three months following the passage of minimum wage legislation rather than after implementation, suggesting that pricing of groceries is forward-looking.