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

Koichiro Ito

No 18533, NBER Working Papers from National Bureau of Economic Research, Inc

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 sub-optimizing behavior makes nonlinear pricing unsuccessful in achieving its policy goal of energy conservation and critically changes the welfare implications of nonlinear pricing.

JEL-codes: L11 L51 L94 L98 Q41 Q48 Q58 (search for similar items in EconPapers)
Date: 2012-11
New Economics Papers: this item is included in nep-ene, nep-hme and nep-ind
Note: EEE
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Citations: View citations in EconPapers (41)

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

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