Monopolies aren’t as sexy as they want you to think

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A pair of economists, MIT Sloan assistant professor Jacquelyn Pless and her co-author, Arthur A. van Benthem of The Wharton School, have released an analysis on the effects of subsidies in relation to the price of residential solar systems for consumers. The report’s findings are based off of 2010-2013 data from the California Solar Initiative, a program which started in 2007 with a 10-year planned budget of more than $2 billion in rebates for customers who installed and companies that leased systems with homeowners.

What Pless and Benthem found was that residents who installed their own solar systems outright received about 78 cents for every dollar in subsidies. Customers who leased solar panels, however saw a $1.53 reduction in price for every dollar of subsidy the leasing company collected.

This might seem like a good thing for consumers because they face lower prices,” said Pless. “But what we show — with both theory and data — is that this is a story about market power.

The solar industry is one subjected to marginal cost shocks, meaning that the prices of commodities within the industry are partially at the will of the subsidies they are given, but are not necessarily defined in price by those subsidies. The subsidies received from installing a system can either be given to a customer straight up, or passed through, via other compensatory avenues, as Pless puts it:

That subsidy goes to [the third-party owners], but they can kind of pass through the subsidy to you in the form of more attractive lease terms, perhaps lower monthly payments, that you wouldn’t have gotten otherwise.

The reason those increased subsidies are not as rosy as they may appear at first glance is because of the economic theory of over-shifting. Essentially, when a pass-through rate exceeds 100%, it’s called over-shifting.

What we’re seeing in this study is essentially the inverse of traditional over-shifting.

In traditional over-shifting, a producer increases the cost to the consumer by more than their increase in the cost of producing the good. For example, let’s say a carton of ice cream costs $5, but there is a $1 tax put on dairy. In response, the seller ice cream increases the price to $7. That’s an over-shift: they didn’t just pass along the increased cost to the consumer, they passed along the increase plus a little more margin.

So, instead of an increased tax providing the foundation for a provider to increase their cost beyond the amount that tax adds, we’re seeing subsidies allow customers to receive from a provider a greater total rebate-equivalent-benefit than they would receive if just given the rebate alone.

Basically what this proved to the researches was that there was an imbalance of the third-party owners in the California residential solar market. During the time of the study, the market was mostly dominated by just a few large firms, namely SolarCity. This is where the math begins to make sense: it’s easier for a company to give back a little extra to consumers when said company controls essentially an entire market.

“If you can do this kind of pretty simple, straightforward pass-through type of analysis and you find over-shifting, this might be an indication that the market’s not competitive, and that might be some type of motivation for competition authorities to step in,” Pless said.