Price Discrimination Based on Downstream Regulation: Evidence from the Market for SO2 Scrubbers

Evidence from the market for flue-gas desulfurization devices [scrubbers] in the U.S. is used to show that the choice and stringency of environmental regulation have substantial effects on the mark-up of an abatement technology. The imperfectly competitive upstream eco-industry charges higher prices for scrubbers to power plants participating in Phase I of the tradable permit scheme for sulphur dioxide than to those subject to emission standards. The mark-up also depends on stringency of the emission standard, geographic location and electricity market regulation. Previous empirical studies neglect this source of endogeneity. Market power and price discrimination have repercussions on the rate of diffusion and innovation incentives.