Working Paper: NBER ID: w13778
Authors: Steven J. Davis; Cheryl Grim; John Haltiwanger; Mary Streitwieser
Abstract: We develop a large customer-level database to study electricity pricing to U.S. manufacturing plants from 1963 to 2000. We document tremendous dispersion in price per kWh, trace that dispersion to quantity discounts and spatial differentials, estimate the role of cost factors in quantity discounts, and test whether marginal price schedules conform to marginal cost and Ramsey pricing conditions. Our cost analysis and pricing tests rely on a novel empirical approach that exploits utility-level differences in the customer size distribution to estimate how supply costs vary with purchase quantity.
The results reveal that annual supply costs per kWh fall by more than half in moving from smaller to bigger purchasers, providing a clear cost-based rationale for quantity discounts. Before the mid 1970s, marginal price and marginal cost schedules are nearly identical, in line with efficient pricing. In later years, marginal supply costs exceed marginal prices for smaller manufacturing customers by 10% or more. In contrast to a clear role for cost factors, our evidence provides no support for a standard Ramsey-pricing interpretation of quantity discounts. Spatial dispersion in retail electricity prices among states, counties and utility service territories is large and rises over time for smaller purchasers.
Keywords: Electricity Pricing; Manufacturing; Cost Analysis
JEL Codes: L60; L94; Q40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| smaller purchasers (D49) | annual supply costs per kWh (Q41) |
| post-1973 (N42) | marginal supply costs exceed marginal prices (D40) |
| geographic factors (R12) | spatial dispersion in retail electricity prices (R32) |
| before the mid-1970s (B15) | marginal prices and marginal costs were nearly identical (D41) |