The markup analysis begins with an estimate of the impact of energy-efficiency standards on the manufacturing price of a product. There is usually a distribution chain of intermediaries through which equipment passes from the manufacturer before it is sold to the final consumer. Each time the equipment changes hands, the price is increased by a certain amount. EES has developed a methodology for predicting this markup in price for each step of the chain.

The markup analysis is characterized by the distinction it makes between two types of markups: (1) the baseline markup, the ratio of final consumer price to original manufacturer's price, and (2) the incremental markup, the ratio of change in final consumer price to change in manufacturer's price (also called cost of goods). The incremental markup tends to be lower than the baseline markup because the labor component of marginal costs, at both the wholesale and retail levels, does not increase due to a standard, despite the increase in the cost of goods sold.

The analysis of the markups along the distribution chain assumes perfect competition. This is because the appliance industry is characterized by a large number of wholesalers, general contractors, and distribution/installation contractors. For example, more than 5,500 HVAC wholesalers, 37,000 general contractors, and 84,000 HVAC contractors are listed in the latest U.S. Census of Manufactures.

The markup analysis draws upon a mix of survey and census data to estimate baseline and incremental markups and, where possible, uses these data sources to confirm the accuracy of its own markup methodology. The similarity between markup estimates derived from the two data sources supports the EES methodology.

A 2004 LBNL report, An Analysis of Price Determination and Markups in the Air-Conditioning and Heating Equipment Industry [PDF], examines the effects of energy-efficiency standards on markups and the final price of consumer goods.

Examples of markup analyses can also be found in Appendix D of the 2001 Technical Support Document (TSD) for the energy conservation standard for residential central air conditioners and in the 2004 Advance Notice of Proposed Rulemaking (ANOPR) TSDs for the current rulemakings for commercial unitary air conditioners (Chapter 7), residential furnaces and boilers (Chapter 5), and distribution transformers (Chapter 7).