Bias in reduced-form estimates of pass-through

Abstract

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Pass‐through in a concentrated industry: empirical evidence and regulatory implications

“…We distinguish between responses to firm-specific cost shocks ("firm-specific pass-through") and responses to market-wide cost shocks ("market pass-through"). We then discuss how omitting the costs of competitors from a reduced-form regression affects the interpretation of coefficients, following MacKay et al (2014). Finally, we estimate an augmented empirical model that accounts explicitly for competitor costs, and find that our main results are robust.…”

Pass‐Through and the Prediction of Merger Price Effects

“…First, MacKay et al . [] develop that econometric biases can plague reduced‐form linear regressions of prices on cost shifters if pass‐through is non‐constant, even if standard orthogonality conditions hold. In such settings, the regression recovers the average effect of costs on prices, but this need not map into pass‐through at any particular price point.…”

“… Recent research demonstrates that standard orthogonality conditions are insufficient to ensure that reduced‐form regressions of prices on cost shifters yield unbiased estimates of pass‐through (MacKay et al . []). Bias arises, for example, if pass‐through is not constant in prices and the cost distribution is asymmetric.…”

Incentive pass-through for residential solar systems in California

“…7 The reduced-form analysis could potentially suffer from specification errors and omitted cost components bias, which can be avoided by assuming a constant pass-through rate. SeeMacKay et al (2014) for more details.…”