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Do Consumers Distinguish Fixed Cost from Variable Cost? "Schmeduling" in Two-Part Tariffs in Energy

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  • Koichiro Ito
  • Shuang Zhang

Abstract

A central assumption in economics is that consumers properly distinguish fixed cost from variable cost. This assumption is fundamental to various economic theories, including optimal taxation, redistribution, and price discrimination. Using a quasi-experiment in heating price reform in China, we find empirical evidence that is inconsistent with this conventional assumption and more consistent with the "schmeduling" model in Liebman and Zeckhauser (2004). As we demonstrate its policy implications for two-part energy tariffs, this schmeduling behavior makes fixed costs directly relevant to the perceived relative prices of goods, and therefore alters the welfare implications of price, tax, and subsidy designs.

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  • Koichiro Ito & Shuang Zhang, 2025. "Do Consumers Distinguish Fixed Cost from Variable Cost? "Schmeduling" in Two-Part Tariffs in Energy," American Economic Journal: Economic Policy, American Economic Association, vol. 17(2), pages 194-223, May.
    • Handle: RePEc:aea:aejpol:v:17:y:2025:i:2:p:194-223
    DOI: 10.1257/pol.20230613
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    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • P28 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Natural Resources; Environment
    • P36 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Consumer Economics; Health; Education and Training; Welfare, Income, Wealth, and Poverty

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