Working Paper: NBER ID: w18533
Authors: Koichiro Ito
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.
Keywords: nonlinear pricing; electricity pricing; consumer behavior; energy conservation
JEL Codes: L11; L51; L94; L98; Q41; Q48; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| suboptimal response to average price (D41) | efficiency costs (D61) |
| average price (P22) | consumer response (D16) |
| marginal price (D41) | consumer response (D16) |
| expected marginal price (D41) | consumer response (D16) |
| average price (P22) | marginal price effect (D40) |
| average price (P22) | consumption (E21) |