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

Koichiro Ito

American Economic Review, 2014, vol. 104, issue 2, 537-63

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.

JEL-codes: D12 L11 L94 L98 Q41 (search for similar items in EconPapers)
Date: 2014
Note: DOI: 10.1257/aer.104.2.537
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Citations: View citations in EconPapers (424)

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Working Paper: Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing (2012)
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