Cost pass-through in strategic oligopoly: Sectoral evidence for the EU ETS

Arbeitspapier

Price adjustments, particularly the cost pass-through relationships, are at the core of the analysis on how asymmetric climate change policy initiates two channels of carbon leakage: (decreasing) market shares and profit margins. Using advanced time-series techniques, this paper explores the pass-through relationships in an oligopoly setting. Under the condition of oligopolistic competition with strategic interactions, the cost pass-through of domestic firms is restricted by strategic interactions with foreign competitors. The empirical section demonstrates that strategic pricing in the presence of the incomplete cost pass-through is by far the prevailing behaviour of German energy-intensive sectors participating in the EU Emissions Trading Scheme (ETS). The relatively low cost pass-through rates in the long-run in most sectors in our sample - in comparison to studies which do not account for strategic interactions - are consistent with earlier findings. Additional costs induced by the EU ETS are therefore likely to be absorbed through a reduction of profit margin, creating incentives to relocate business abroad. Policy implications of the results are that strategic interactions between domestic and foreign firms could be a critical factor in applying offsetting instruments to address carbon leakage domestically. Accounting for oligopolistic structures - with and without strategic interactions - should therefore be a central issue within the broader context of how market structure affects climate change policies.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ZEW Discussion Papers ; No. 10-056

Classification and Topics

• Classification: Wirtschaft ; Trade and Environment ; Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes ; Production, Pricing, and Market Structure; Size Distribution of Firms
• Subject: cost pass-through ; strategic oligopoly ; emissions trading scheme ; Emissionshandel ; Umweltschutzkosten ; Betriebliche Preispolitik ; Verarbeitendes Gewerbe ; Marktmacht ; Internationaler Wettbewerb ; Oligopol ; Schätzung ; Deutschland

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Alexeeva-Talebi, Victoria
• Event: Veröffentlichung
• (who): Zentrum für Europäische Wirtschaftsforschung (ZEW)
• (where): Mannheim
• (when): 2010

Further information

• Handle: http://hdl.handle.net/10419/40163
• Last update: 10.03.2025, 11:43 AM CET