Rational, Lazy or Confused: Evidence of misperception in consumer responsiveness to nonlinear prices

Abstract

When faced with nonlinear prices, do consumers respond to marginal or average price? Or, as this paper explores, do they simply misunderstand nonlinear prices? Using a rich dataset that exploits a natural experiment of electricity consumers in British Columbia, Canada, this paper finds evidence of marginal cost responsiveness, in contrast to recent literature. A deeper examination, however, suggests this result is driven by a small share of households who misperceive the tariff. This finding highlights the important role misperception can play in consumer responsiveness to nonlinear pricing and serves as a methodological caution to consider heterogeneous treatment effects.

Date
Location
Toulouse School of Economics