Works in Progress
The Effect of Price-to-Beat Rule When Consumers Have Inertia: Evidence from Texas Electricity Retail Market (JMP)
This paper examines the Price-to-Beat (PTB) rule, a unique regulatory mechanism implemented during Texas’s electricity market restructuring. The rule regulated the incumbent retailer’s pricing by setting a margin above the competitive level to promote entry by new firms. Because this design intentionally raised prices, it has been widely criticized. Using rich meter-level data from Texas’s largest service area, I estimate the rule’s impact on retail prices and consumer welfare. I develop a random-coefficient discrete-choice model to distinguish heterogeneity in consumers’ preference for the incumbent and their switching costs. A mover subsample helps identify switching costs, while individual-specific price data allows for direct identification of price sensitivity. The model is estimated via simulated maximum likelihood with nested contraction mapping. I find substantial switching costs that is roughly twice the average monthly electricity bill. On the supply side, I specify a static pricing model in which retailers trade off profit and market share. Counterfactual simulations show that, absent the PTB rule, the incumbent would roughly double its price, while new entrants would increase prices modestly. The PTB rule therefore saved households about $136 per month, which is more than an average monthly electricity bill. Shorter contract lengths would reduce these savings. This paper provides the first structural analysis of the PTB rule and offers new insights into how consumer inertia, regulatory design, and firm strategy interact in restructured utility markets.
current draft is here.
The Effect of CAFE Standard on Price Distortion in the US automotive Industry
Pricing strategy is a common strategy of car manufacturers to comply with the CAFE standard in the short run. Firms want to discount vehicles with high fuel economy to promote selling and increase the price of vehicles with low fuel economy to prevent selling. I examine the price distortion caused by the CAFE standard during 2012-2015, incorporating the most updated features - the credit trading system. I make use of the credit price information and build a demand and supply model to jointly estimate consumers' substitution patterns and manufacturers' marginal costs. Then I conduct a counterfactual analysis by comparing the real and the counterfactual price when the CAFE standard is removed. The price distortion is evident: basically, fuel-efficient vehicles are undervalued, and fuel-inefficient vehicles are overvalued. The price adjustments in both directions are around 5%, and large price changes go to the price decrease on some super fuel-efficient passenger cars, which are up to 20 %. Car manufacturers, including Tesla, which only produces electric cars, are willing to discount fuel-efficient vehicles in response to the CAFE standard.