Cost Pass Through

The European Union introduced the EU Emissions Trading Scheme (ETS) in 2005, which places a cap on aggregate emissions from the most energy-intensive industrial sectors. In the first two market phases, firms received allocations mostly at no cost. The general public took issue with the fact that firms raised their output prices despite free allowance allocation, reaping so-called "windfall profits." Providing allowances for free implies that the polluters receive the scarcity rent, whereas sound reasons exist to distribute these rents differently (e.g., Bovenberg and Goulder, 2000). 2. Smale et al. (2006) focused on the other sectors covered by the EU ETS and found positive but smaller cost passthrough rates that varied with the degree of a sector's exposure to competition from firms outside the EU. Due to transmission constraints, outside competition is almost zero for the power sector.

A number of empirical studies document that marginal cost shocks are not fully passed through to prices at the firm level and that prices are substantially less volatile than costs. We show that in the relative-deep-habits model of Ravn, Schmitt-Grohé, and Uribe (2006), firm-specific marginal cost shocks are not fully passed through to product prices. That is, in response to a firm-specific increase in marginal costs, prices rise, but by less than marginal costs leading to a decline in the firm-specific markup of prices over marginal costs. Pass-through is predicted to be even lower when shocks to marginal costs are anticipated by firms. In our model unanticipated firm-specific cost shocks lead to incomplete pass-through (or a decline in markups) of about 20 percent and anticipated cost shocks are associated with incomplete pass-through of about 50 percent. The model predicts that cost pass-through is increasing in the persistence of marginal cost shocks and U-shaped in the strength of habits. The relative-deep-habits model implies that conditional on marginal cost disturbances, prices are less volatile than marginal costs.

The great majority of analyses made in transport economics use, explicitly or, more often, implicitly, the common assumption of perfect competition. This is the case, for instance, when infrastructure projects are evaluated using the mere sum of the surpluses of transport users and providers. Even when putting aside the question of externalities such as noise, safety or environmental quality, the real chain of economic interactions that takes place in transport provision or downstream of transport provision is not taken into account. Surely enough, describing and simulating this chain could be quite complex. Nevertheless, it is not uninteresting to try to estimate if it does make a big difference or not to make this approximation. The paper makes such an attempt for two broad kinds of applications of transport economics: Transport pricing: building on a generic formulation of imperfect competition pricing behaviour that encompasses a broad range of competition situations, and taking the railway case as a benchmark, simulation results give an idea of the order of magnitude of optimal tariff variation when perfect competition is assumed as compared to "real" competition situation. These results are completed and somewhat mitigated by observations on the final welfare impact of this discrepancy. Project assessment: the consequences of imperfect competition situations are analysed, first, for transport provision, discussing the diverse levels of representation of economic interactions that are used in usual project assessment. Second, we use both theoretical and heuristic formulations of the interactions that take place within simple chains of economic actors downstream of transport provision. Besides pure "short sighted" profit maximisation and the base case of perfect competition, the more general imperfect competition modelling mentioned above is completed with simple "surplus sharing" behaviours. As a whole, imperfect competition effects seem to be high within the transport sector and should be treated, both for project assessment and for infrastructure pricing. The case is less clear as regards imperfect competition downstream of transport but still deserves attention. The numerous simulations and the economic analyses performed lead us to give hints for improving some of the current practices of economic assessment concerning infrastructure pricing and project assessment.

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Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence.

This paper analyzes cost pass through rates in the fluid milk category. Like most agricultural commodities, prices for raw milk display large volatility over time. Using a long panel data from several markets across the US, we study the extent of asymmetry in price response by retailers to increases versus decreases in the cost of raw milk. The modeling approach accounts for asymmetries associated with both the magnitude and timing of cost pass through. Heterogeneity in price response across retailers is captured using a hierarchical structure, where population level parameters are allowed to vary across retailers due to observed and unobserved factors. We use an extensive set of economic, demographic and product characteristic descriptors to identify underlying drivers of the variation in pass through rates across retailers. The results show that cost pass through in the milk category is highly asymmetric, both in terms of the speed and magnitude of pass through following cost chan...

In this study, we empirically examine the extent of price rigidity using a unique store-level time-series data set – consisting of (i) actual retail transaction prices, (ii) actual wholesale transaction prices which represent both the retailers’ costs and the prices received by manufacturers, and (iii) a measure of manufacturers’ costs – for 12 goods in two widely used consumer product categories. We simultaneously examine the extent of price rigidity for each of the 12 products at both, final goods and intermediate goods levels. We study two notions of price rigidity employed in the existing literature: (i) the frequency of price changes, and (ii) the response of prices to exogenous cost changes. We find that retail prices exhibit remarkable flexibility in terms of both notions of price rigidity, i.e., they change frequently and they seem to respond quickly and fully to cost changes. Furthermore, we find that retail prices respond not just to their direct costs, but also to the upstream manufacturers’ costs, which further reinforces the extent of the retail price flexibility. At the intermediate goods level of the market, in contrast, we find relatively more evidence of rigidity in the response of manufacturers prices to cost changes. This despite the fact that wholesale prices change frequently and therefore exhibit flexibility according to the first notion of price rigidity.