Relating Product Prices to Long-Run Marginal Cost: Evidence from Solar Photovoltaic Modules

Relating Product Prices to Long-Run Marginal Cost: Evidence from Solar Photovoltaic Modules

By Stefan J. Reichelstein, Ansu Sahoo
April 2017Working Paper No. 3069

Forthcoming in Contemporary Accounting Research

A basic tenet of microeconomics is that for a competitive industry in equilibrium the market price of a product will be equal to its marginal cost. This paper develops a model framework and a corresponding empirical inference procedure for estimating longrun marginal cost in industries where production costs decline over time. In the context of the solar photovoltaic (PV) module industry, we rely primarily on firm-level financial accounting data to estimate the long-run marginal cost of PV modules for the years 2008–2013. During those years, the industry experienced both unprecedented price declines and significant expansions of manufacturing capacity. We compare the trajectory of average sales prices with the estimated long-run marginal costs in order to quantify the extent to which actual price declines were attributable to reductions in production costs. The trajectory of estimated product costs is then extrapolated to forecast an equilibrium trend line for future PV module prices.

Keywords
sustainable energy, long-run marginal cost, cost estimation, learning-by-doing, price dynamics