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Bayesian Estimation of Demand Functions under Block Rate Pricing

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Author Info
Koji Miyawaki (Graduate School of Economics, University of Tokyo)
Yasuhiro Omori (Faculty of Economics, University of Tokyo)
Akira Hibiki (National Institute for Environmental Studies and Department of Social Engineering, Tokyo Insitute of Technology)

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Abstract

This article proposes a Bayesian estimation method of the demand function under block rate pricing, mainly focusing on increasing block rat epricing. Block rate pricing is often observed in public sectors, such as water and electricity. Under this price structure, price changes when consumption exceeds a certain threshold, and the demand function is subject to a piece wise-linear budget constraint. We apply a discrete/continuous choice model to analyze household behavior with such a price system and take a hierarchical Bayesian approach to estimate its demand function. Moreover, a separability condition is additionally considered to obtain proper estimates. The model is extended to allow random coefficients for panel data and spatial correlation to account for consumer heterogeneity of spatial data. The proposed method is applied to estimate the Japanese residential water demand function under increasing block rate pricing.

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Publisher Info
Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-424.

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Length: 29pages
Date of creation: May 2006
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Handle: RePEc:tky:fseres:2006cf424

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  9. David J. Spiegelhalter & Nicola G. Best & Bradley P. Carlin & Angelika van der Linde, 2002. "Bayesian measures of model complexity and fit," Journal Of The Royal Statistical Society Series B, Royal Statistical Society, vol. 64(4), pages 583-639. [Downloadable!] (restricted)
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  11. Sheila Olmstead & W. Michael Hanemann & Robert N. Stavins, 2007. "Water Demand Under Alternative Price Structures," NBER Working Papers 13573, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Misiolek, Walter S., 1980. "Effluent taxation in monopoly markets," Journal of Environmental Economics and Management, Elsevier, vol. 7(2), pages 103-107, June. [Downloadable!] (restricted)
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