Pass-Through of Input Cost Shocks Under Imperfect Competition: Evidence from the U.S. Fracking Boom

31 Pages Posted: 20 Nov 2017

See all articles by Erich Muehlegger

Erich Muehlegger

University of California, Davis - Department of Economics

Richard Sweeney

Boston College - Department of Economics

Date Written: November 2017

Abstract

The advent of hydraulic fracturing lead to a dramatic increase in US oil production. Due to regulatory, shipping and processing constraints, this sudden surge in domestic drilling caused an unprecedented divergence in crude acquisition costs across US refineries. We take advantage of this exogenous shock to input costs to study the nature of competition and the incidence of cost changes in this important industry. We begin by estimating the extent to which US refining’s divergence from global crude markets was passed on to consumers. Using rich microdata, we are able to decompose the effects of firm-specific, market-specific and industry-wide cost shocks on refined product prices. We show that this distinction has important economic and econometric significance, and discuss the implications for prospective policy which would put a price on carbon emissions. The implications of these results for perennial questions about competition in the refining industry are also discussed.

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Suggested Citation

Muehlegger, Erich and Sweeney, Richard, Pass-Through of Input Cost Shocks Under Imperfect Competition: Evidence from the U.S. Fracking Boom (November 2017). NBER Working Paper No. w24025. Available at SSRN: https://ssrn.com/abstract=3074203

Erich Muehlegger (Contact Author)

University of California, Davis - Department of Economics ( email )

One Shields Drive
Davis, CA 95616-8578
United States

Richard Sweeney

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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