The Effect of Coal Combustion Byproducts on the Pricing Strategy of Upstream Industries

Abstract

Price discrimination is often difficult to disentangle from price dispersion due to a lack of transaction level data capable of tracking sales from individual companies to quantifiably heterogeneous groups of consumers. This paper uses coal mine-mouth prices and transportation prices paid by regulated coal-fired power plants in the U.S. coal market during the time period 2008-2010 to study how coal mines and transportation companies practice price discrimination against electricity plants. Power plants with heterogeneous demand for coal are perfectly identified based upon their ability to market flue gas desulfurization (FGD) gypsum, which is a byproduct produced from scrubbing SO2 emissions. Because sulfur is the raw material for FGD gypsum byproduct production, gypsum sellers are anticipated to have a more inelastic demand for high sulfur coal. Results indicate that individual coal mines charges different marginal prices to gypsum sellers in comparison to non-sellers on the basis of coal quality for transactions occurring during the same month of the same year. Coal-fired power plants capable of selling FGD gypsum byproducts are estimated to pay an 8.8 ¢/MMBtu marginal price premium for a 1 percentage point increase in average sulfur content. Partitioning mines into high sulfur and low sulfur mine types reveals that high sulfur mines charge a 21.2 ¢/MMBtu (8.4%) total price premium to gypsum sellers and low sulfur mines offer a 9.5 ¢/MMBtu (3.8%) total price discount to gypsum sellers. Coal mines are estimated to capture the largest share of the aforementioned rents from price discrimination (71% to 98%), and the remaining accrues to coal transporters.

Keywords: third-degree price discrimination, byproducts, FGD gypsum, Clean Air Act Amendment

JEL Classification: L11, L71, L94