Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing
AbstractNonlinear 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.
CitationIto, 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
- 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