IDEAS home Printed from https://ideas.repec.org/a/eee/jpolmo/v45y2023i6p1167-1183.html
   My bibliography  Save this article

A self-selection pricing mechanism for residential electricity: Measures of sustainability and equity to balance market mechanisms and government controls

Author

Listed:
  • Zhang, Xinhua
  • Hueng, C. James
  • Lemke, Robert J.

Abstract

We design a self-selection-pricing mechanism in which an electricity supplier offers its customers an optimal menu of contracts subject to a price ceiling set by the government, a hybrid model of market mechanism and government controls. We calibrate the model using information from a residential electricity market in China. Our mechanism outperforms the tiered-electricity-pricing system in China in terms of environmental and industrial sustainability but comes at the cost of providing less protection for low-income households (i.e., less equity). We conclude by offering measures of sustainability and equity that governments could use when trying to balance the trade-off between the two.

Suggested Citation

  • Zhang, Xinhua & Hueng, C. James & Lemke, Robert J., 2023. "A self-selection pricing mechanism for residential electricity: Measures of sustainability and equity to balance market mechanisms and government controls," Journal of Policy Modeling, Elsevier, vol. 45(6), pages 1167-1183.
    • Handle: RePEc:eee:jpolmo:v:45:y:2023:i:6:p:1167-1183
    DOI: 10.1016/j.jpolmod.2023.10.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0161893823001126
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jpolmod.2023.10.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. He, Y.X. & Yang, L.F. & He, H.Y. & Luo, T. & Wang, Y.J., 2011. "Electricity demand price elasticity in China based on computable general equilibrium model analysis," Energy, Elsevier, vol. 36(2), pages 1115-1123.
    2. Sun, Chuanwang, 2015. "An empirical case study about the reform of tiered pricing for household electricity in China," Applied Energy, Elsevier, vol. 160(C), pages 383-389.
    3. Thirumulanathan, D. & Sundaresan, Rajesh & Narahari, Y., 2019. "Optimal mechanisms for selling two items to a single buyer having uniformly distributed valuations," Journal of Mathematical Economics, Elsevier, vol. 82(C), pages 1-30.
    4. repec:hal:pseose:halshs-00833350 is not listed on IDEAS
    5. Atalla, Tarek & Bigerna, Simona & Bollino, Carlo Andrea & Polinori, Paolo, 2018. "An alternative assessment of global climate policies," Journal of Policy Modeling, Elsevier, vol. 40(6), pages 1272-1289.
    6. De Nijs, Romain, 2013. "Information provision and behaviour-based price discrimination," Information Economics and Policy, Elsevier, vol. 25(1), pages 32-40.
    7. Romain de Nijs, 2013. "Information provision and behaviour-based price discrimination," Post-Print halshs-00833350, HAL.
    8. Sato, Susumu, 2019. "Freemium as optimal menu pricing," International Journal of Industrial Organization, Elsevier, vol. 63(C), pages 480-510.
    9. Rasanen, Mika & Ruusunen, Jukka & Hamalainen, Raimo P., 1997. "Optimal tariff design under consumer self-selection," Energy Economics, Elsevier, vol. 19(2), pages 151-167, May.
    10. Walter, Jason M., 2020. "Comparing the effectiveness of market-based and choice-based environmental policy," Journal of Policy Modeling, Elsevier, vol. 42(1), pages 173-191.
    11. Rothschild, Casey, 2019. "Screening with convex menus and optimal flow taxation," Journal of Public Economics, Elsevier, vol. 178(C).
    12. Carter, Adrian & Craigwell, Roland & Moore, Winston, 2012. "Price reform and household demand for electricity," Journal of Policy Modeling, Elsevier, vol. 34(2), pages 242-252.
    13. Yoon, Seok, 2004. "Welfare losses due to monopoly: Korea's case," Journal of Policy Modeling, Elsevier, vol. 26(8-9), pages 945-957, December.
    14. Hart, Sergiu & Nisan, Noam, 2019. "Selling multiple correlated goods: Revenue maximization and menu-size complexity," Journal of Economic Theory, Elsevier, vol. 183(C), pages 991-1029.
    15. Youn, Hyungho & Jin, Hyun Joung, 2016. "The effects of progressive pricing on household electricity use," Journal of Policy Modeling, Elsevier, vol. 38(6), pages 1078-1088.
    16. Romain de Nijs, 2013. "Information provision and behaviour-based price discrimination," PSE-Ecole d'économie de Paris (Postprint) halshs-00833350, HAL.
    17. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    18. Silva, Susana & Soares, Isabel & Pinho, Carlos, 2017. "Electricity demand response to price changes: The Portuguese case taking into account income differences," Energy Economics, Elsevier, vol. 65(C), pages 335-342.
    19. Tang, Pingzhong & Wang, Zihe, 2017. "Optimal mechanisms with simple menus," Journal of Mathematical Economics, Elsevier, vol. 69(C), pages 54-70.
    20. Pereira Uhr, Daniel de Abreu & Squarize Chagas, André Luis & Ziero Uhr, Júlia Gallego, 2019. "Estimation of elasticities for electricity demand in Brazilian households and policy implications," Energy Policy, Elsevier, vol. 129(C), pages 69-79.
    21. William James Adams & Janet L. Yellen, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(3), pages 475-498.
    22. Garrett, Daniel F., 2014. "Robustness of simple menus of contracts in cost-based procurement," Games and Economic Behavior, Elsevier, vol. 87(C), pages 631-641.
    23. Chindarkar, Namrata & Goyal, Nihit, 2019. "One price doesn't fit all: An examination of heterogeneity in price elasticity of residential electricity in India," Energy Economics, Elsevier, vol. 81(C), pages 765-778.
    24. Wang, Chen & Zhou, Kaile & Yang, Shanlin, 2017. "A review of residential tiered electricity pricing in China," Renewable and Sustainable Energy Reviews, Elsevier, vol. 79(C), pages 533-543.
    25. Shrestha, Ratna K., 2017. "Menus of price-quantity contracts for inducing the truth in environmental regulation," Journal of Environmental Economics and Management, Elsevier, vol. 83(C), pages 1-7.
    26. Zhou, Shaojie & Teng, Fei, 2013. "Estimation of urban residential electricity demand in China using household survey data," Energy Policy, Elsevier, vol. 61(C), pages 394-402.
    27. Thirumulanathan, D. & Sundaresan, Rajesh & Narahari, Y., 2019. "On optimal mechanisms in the two-item single-buyer unit-demand setting," Journal of Mathematical Economics, Elsevier, vol. 82(C), pages 31-60.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wang, Li & Zhang, Xin-Hua & Zhang, Yue-Jun, 2023. "Designing the pricing mechanism of residents’ self-selection sales electricity based on household size," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 860-878.
    2. Javier Bueno & Desiderio Romero-Jordán & Pablo del Río, 2020. "Analysing the Drivers of Electricity Demand in Spain after the Economic Crisis," Energies, MDPI, vol. 13(20), pages 1-18, October.
    3. Zhang, Jianqiang & Liang, Qi & Huang, Jian, 2016. "Forward advertising: A competitive analysis of new product preannouncement," Information Economics and Policy, Elsevier, vol. 37(C), pages 3-12.
    4. Esteves, Rosa-Branca & Cerqueira, Sofia, 2017. "Behavior-based pricing under imperfectly informed consumers," Information Economics and Policy, Elsevier, vol. 40(C), pages 60-70.
    5. Jeong, Yuncheol & Maruyama, Masayoshi, 2018. "Positioning and pricing strategies in a market with switching costs and staying costs," Information Economics and Policy, Elsevier, vol. 44(C), pages 47-57.
    6. Jerzy Andruszkiewicz & Józef Lorenc & Agnieszka Weychan, 2019. "Demand Price Elasticity of Residential Electricity Consumers with Zonal Tariff Settlement Based on Their Load Profiles," Energies, MDPI, vol. 12(22), pages 1-22, November.
    7. Hoe Sang Chung, 2020. "Quality choice and behavior-based price discrimination," Journal of Economics, Springer, vol. 131(3), pages 223-236, December.
    8. Vickers, John, 2021. "Competition for imperfect consumers," International Journal of Industrial Organization, Elsevier, vol. 79(C).
    9. Colombo, Stefano, 2015. "Should a firm engage in behaviour-based price discrimination when facing a price discriminating rival? A game-theory analysis," Information Economics and Policy, Elsevier, vol. 30(C), pages 6-18.
    10. Wang, Xiaolei & Wei, Chunxin & Wang, Yanhua, 2022. "Does the current tiered electricity pricing structure still restrain electricity consumption in China's residential sector?," Energy Policy, Elsevier, vol. 165(C).
    11. Umezawa, Masashi, 2022. "Behavior-based price discrimination in a horizontally and vertically differentiated duopoly with switching costs," Information Economics and Policy, Elsevier, vol. 61(C).
    12. Khanna, Nina Zheng & Guo, Jin & Zheng, Xinye, 2016. "Effects of demand side management on Chinese household electricity consumption: Empirical findings from Chinese household survey," Energy Policy, Elsevier, vol. 95(C), pages 113-125.
    13. Liu, Chang & Lin, Boqiang, 2020. "Is increasing-block electricity pricing effectively carried out in China? A case study in Shanghai and Shenzhen," Energy Policy, Elsevier, vol. 138(C).
    14. Roesler, Anne-Katrin & Deb, Rahul, 2021. "Multi-Dimensional Screening: Buyer-Optimal Learning and Informational Robustness," CEPR Discussion Papers 16206, C.E.P.R. Discussion Papers.
    15. José A. Novo‐Peteiro, 2023. "Product design with attribute dependence," Manchester School, University of Manchester, vol. 91(4), pages 361-385, July.
    16. Jakša Cvitanić & Julien Hugonnier, 2022. "Optimal fund menus," Mathematical Finance, Wiley Blackwell, vol. 32(2), pages 455-516, April.
    17. Garrett, Daniel F., 2020. "Payoff Implications of Incentive Contracting," TSE Working Papers 20-1140, Toulouse School of Economics (TSE).
    18. Naixin Zhu, 2023. "Dissertation on Applied Microeconomics of Freemium Pricing Strategies in Mobile App Market," Papers 2305.09479, arXiv.org.
    19. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 34, pages 2221-2299, Elsevier.
    20. Kuang, Yunming & Lin, Boqiang, 2021. "Performance of tiered pricing policy for residential natural gas in China: Does the income effect matter?," Applied Energy, Elsevier, vol. 304(C).

    More about this item

    Keywords

    Information-screening; Residential electricity pricing; Regulation; Mechanism design;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jpolmo:v:45:y:2023:i:6:p:1167-1183. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505735 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.