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

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. (JEL D24, L11, L94. L95, L98, Q35)