Signalling for electricity demand response: When is truth telling optimal?

Rene Aid (), Anupama Kowli () and Ankur Kulkarni ()
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Rene Aid: Universite Paris Dauphine
Anupama Kowli: Indian Institute of Technology Bombay
Ankur Kulkarni: Indian Institute of Technology Bomaby

Economics Bulletin, 2025, vol. 45, issue 4, 1850 - 1859

Abstract: Electricity providers as well as transmission system operators (TSO) around the world implement demand response programs for reducing electricity consumption by sending information on the state of balance between supply demand to end-use consumers. We construct a Bayesian persuasion model to analyse such demand response programs. Using a simple model consisting of two time steps for contract signing and invoking, we analyse the relation between the pricing of electricity and the incentives of an energy provider to garble information about the true state of the generation. We show that if the electricity is priced at its marginal cost of production, the energy provider has no incentive to lie and always tells the truth. On the other hand, we provide conditions where overpricing of electricity leads the energy provider to send no information to the consumer. As a result, in case of electricity mispricing, information provision gives to energy providers a new way to exert market power.

Keywords: Bayesian persuasion; demand response; pricing; signalling (search for similar items in EconPapers)
JEL-codes: D4 D8 (search for similar items in EconPapers)
Date: 2025-12-30
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