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

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  • 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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18533.

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Date of creation: Nov 2012
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Publication status: 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.
Handle: RePEc:nbr:nberwo:18533

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