Heterogeneous Impacts of Cost Shocks, Strategic Bidding, and Pass-Through: Evidence from the New England Electricity Market
New article titled "Heterogeneous Impacts of Cost Shocks, Strategic Bidding, and Pass-Through: Evidence from the New England Electricity Market" by Harim Kim (Norwegian School of Economics).
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.
Read full article here.