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American Economic Review: Vol. 104 No. 2 (February 2014)

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Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing

Article Citation

Ito, Koichiro. 2014. "Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing." American Economic Review, 104(2): 537-63.

DOI: 10.1257/aer.104.2.537

Abstract

Nonlinear pricing and taxation complicate economic decisions by creating multiple marginal prices for the same good. This paper provides a framework to uncover consumers' perceived price of nonlinear price schedules. I exploit price variation at spatial discontinuities in electricity service areas, where households in the same city experience substantially different nonlinear pricing. Using household-level panel data from administrative records, I find strong evidence that consumers respond to average price rather than marginal or expected marginal price. This suboptimizing behavior makes nonlinear pricing unsuccessful in achieving its policy goal of energy conservation and critically changes the welfare implications of nonlinear pricing.

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Online Appendix (209.03 KB) | Download Data Set (25.54 KB) | Author Disclosure Statement(s) (53.91 KB)

Authors

Ito, Koichiro (Boston U)

JEL Classifications

D12: Consumer Economics: Empirical Analysis
L11: Production, Pricing, and Market Structure; Size Distribution of Firms
L94: Electric Utilities
L98: Industry Studies: Utilities and Transportation: Government Policy
Q41: Energy: Demand and Supply; Prices


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