An Analysis of Price Determination and Markups in the Air Conditioning and Heating Equipment Industry

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This report calculates the change in final consumer prices due to minimum efficiency standards, focusing on a standard economic model of the air conditioning and heating equipment (ACHE) wholesale industry. The model examines the relationship between the marginal cost to distribute and sell equipment and the final consumer price in this industry. The model predicts that the impact of a standard on the final consumer price is conditioned by its impact on marginal distribution costs. For example, if a standard raises the marginal cost to distribute and sell equipment a small amount, the model predicts that the standard will raise the final consumer price a small amount as well.

Statistical analysis suggest that standards do not increase the amount of labor needed to distribute equipment — the same employees needed to sell lower efficiency equipment can sell high efficiency equipment. Labor is a large component of the total marginal cost to distribute and sell air conditioning and heating equipment. The study infers from this that standards have a relatively small impact on ACHE marginal distribution and sale costs. Thus, the model predicts that a standard will have a relatively small impact on final ACHE consumer prices. A statistical analysis of U.S. Census Bureau wholesale revenue tends to confirm this model prediction. 

Generalizing, the study finds that the ratio of manufacturer price to final consumer price prior to a standard tends to exceed the ratio of the change in manufacturer price to the change in final consumer price resulting from a standard. The appendix expands the analysis through a typical distribution chain for commercial and residential air conditioning and heating equipment.

Authors: Larry Dale, Dev Millstein, Katie Coughlin, Robert Van Buskirk, Gregory Rosenquist, Alex Lekov, and Sanjib Bhuyan

Information from: Lawrence Berkeley National Laboratory (LBNL)


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