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

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.

[1]  Robert B. Stobaugh,et al.  Price Forecasting and Strategic Planning: The Case of Petrochemicals , 1975 .

[2]  S. Reichelstein,et al.  Decentralized capacity management and internal pricing , 2010 .

[3]  Robin Cooper,et al.  How Cost Accounting Systematically Distorts Product Costs , 1987 .

[4]  Stefan Reichelstein,et al.  Dynamics of Rate-of-Return Regulation , 2012, Manag. Sci..

[5]  Rajiv D. Banker,et al.  Product Costing and Pricing , 2016 .

[6]  R. Margolis,et al.  A wafer-based monocrystalline silicon photovoltaics road map: Utilizing known technology improvement opportunities for further reductions in manufacturing costs , 2013 .

[7]  R. Göx,et al.  Capacity Planning and Pricing Under Uncertainty , 2000 .

[8]  Andrew R Dick,et al.  Learning by Doing and Dumping in the Semiconductor Industry , 1991, The Journal of Law and Economics.

[9]  Ramji Balakrishnan,et al.  Is Assigning Capacity Costs to Individual Products Necessary for Capacity Planning , 1998 .

[10]  M. Lieberman.  The Learning Curve and Pricing in the Chemical Processing Industries , 1984 .

[11]  D. Jorgenson.  Capital Theory and Investment Behavior , 1963 .

[12]  David Afshartous,et al.  Confidence intervals for dependent data: Equating non-overlap with statistical significance , 2010, Comput. Stat. Data Anal..

[13]  W. Rogerson.  On the Relationship Between Historic Cost, Forward Looking Cost and Long Run Marginal Cost , 2011 .

[14]  D. M. Powell,et al.  Modeling the Cost and Minimum Sustainable Price of Crystalline Silicon Photovoltaic Manufacturing in the United States , 2013, IEEE Journal of Photovoltaics.

[15]  Ronald W. Hilton.  Managerial Accounting: Creating Value In A Dynamic Business Environment , 2013 .

[16]  Thomas Pfeiffer,et al.  Cost-based transfer pricing , 2011 .

[17]  Tonio Buonassisi,et al.  Crystalline silicon photovoltaics: a cost analysis framework for determining technology pathways to reach baseload electricity costs , 2012 .

[18]  Stephen Spear.  The electricity market game , 2003, J. Econ. Theory.

[19]  V. G. Narayanan,et al.  Activity‐Based Pricing in a Monopoly , 2003 .

[20]  Suhas A. Sridharan.  Volatility Forecasting Using Financial Statement Information , 2015 .

[21]  Who are You Calling Irrational? Marginal Costs and the Pricing Practices of Firms , 2009 .

[22]  Daniel Hoechle.  Robust Standard Errors for Panel Regressions with Cross-Sectional Dependence , 2007 .

[23]  Bala V. Balachandran,et al.  On the Efficiency of Cost-based Decision Rules for Capacity Planning , 1995 .

[24]  K. Sivaramakrishnan,et al.  A Critical Overview of the Use of Full‐Cost Data for Planning and Pricing , 2002 .

[25]  Alexander Nezlobin,et al.  Managerial Performance Evaluation and Real Options , 2016 .

[26]  Janice C. Eberly,et al.  How Q and Cash Flow Affect Investment without Frictions: An Analytic Explanation , 2011 .

[27]  Jörg Schimmelpfennig,et al.  Modern Industrial Organization , 2014 .

[28]  Anna Rohlfing-Bastian,et al.  Levelized Product Cost: Concept and Decision Relevance , 2014, SSRN Electronic Journal.

[29]  Madhav V. Rajan,et al.  Conservatism correction for the market-to-book ratio and Tobin’s q , 2014 .

[30]  Madhav V. Rajan,et al.  Depreciation Rules and the Relation Between Marginal and Historical Cost , 2009 .

[31]  Unni Pillai,et al.  Drivers of cost reduction in solar photovoltaics , 2015 .

[32]  Unni Pillai,et al.  A Model of Competition in the Solar Panel Industry , 2013 .

[33]  D. M. Powell,et al.  Assessing the drivers of regional trends in solar photovoltaic manufacturing , 2013 .

[34]  J. Bouwens,et al.  Full-Cost Transfer Pricing and Cost Management , 2016 .

[35]  Kenneth J. Arrow,et al.  Optimal capital policy, the cost of capital, and myopic decision rules , 1964 .

[36]  William P. Rogerson,et al.  Intertemporal Cost Allocation and Investment Decisions , 2008, Journal of Political Economy.

[37]  M. Spence.  The Learning Curve and Competition , 1981 .

[38]  R. Gross,et al.  The dynamics of solar PV costs and prices as a challenge for technology forecasting , 2013 .

[39]  Alexander Nezlobin.  Accrual Accounting, Informational Sufficiency, and Equity Valuation , 2012 .

[40]  J. Driscoll,et al.  Consistent Covariance Matrix Estimation with Spatially Dependent Panel Data , 1998, Review of Economics and Statistics.