Multidimensional Nonlinear Pricing: Evidence from Energy Consumption with a Mixture Pricing Mechanism

Abstract

In current business practice, sellers often combine a variety of pricing strategies to segment the market. These practices often leave consumers with pricing schedules that are highly non-linear and multidimensional. This paper develops a novel structural approach for estimating multidimensional non-linear pricing schemes with more than one decision variable. Using a rich and unique panel data of residents’ electricity consumption, we structurally estimate consumer preferences for electricity consumption in a setting with electricity tariffs, using both an Increasing Block Price (IBP) structure as well as a Time-of-Use (ToU) structure. Our model estimation allows us to identify and evaluate household-level elasticities in price elasticity of demand. Our counterfactual analysis shows that a seemingly welfare-improving policy may trigger the strategic behaviour of consumers and, ultimately, be contrary to the original purpose.

Publication
In International Journal of Industrial Organisation (Under Review)
Tong Wang
Tong Wang
Lecturer in Business Economics

My research interests include Economics Theory, Crypto-finance and Digital Economics.