SEMINAR: Dynamic Pricing, Attention, and Automation: Evidence from a Field Experiment in Electricity Consumption
In any situation where marginal cost varies over time, neoclassical models suggest transmitting dynamic prices to buyers increases economic efficiency by aligning prices with costs.
While historically information constraints have limited the frequency of price changes, the diffusion of internet-connected devices is making dynamic pricing increasingly achievable. Yet the positive and normative impacts of dynamic pricing may be quite different from the neoclassical benchmark if agents have limited rationality and face real information processing costs.
I report positive results from a field experiment on the impact dynamic pricing has on residential electricity consumption and find strong evidence of attention frictions. I then develop a model to provide a normative interpretation of the results which suggests the benefits of dynamic pricing may be substantively undermined by information costs. Automation holds the promise of reducing these costs, but must achieve the nontrivial task of accurately reflecting consumer preferences. I report three primary findings. First, households---both with and without automation---significantly respond to a short term price increase by reducing consumption. Second, responses are extremely insensitive to the size of the price change. A price increase of 31 percent causes consumption to fall by 11 percent on average, whereas a price increase of 1,875 percent causes an average reduction of 13 percent. Third, automation causes price responses that are six times larger than the average effect, but does not address inattention. I interpret the results as evidence that households use simplifying heuristics when facing dynamic prices and that automation addresses choice frictions. Applying my model to the setting delivers bounds on the elasticity of demand and sheds light on the attention costs of dynamic pricing.
PhD Candidate, UC Berkeley's Agricultural and Resource Economics Department
James Gillan is a PhD Candidate in UC Berkeley's Agricultural and Resource Economics Department and is on the 2017-2018 academic job market. He conducts research at the intersection of behavioral and environmental economics motivated by the broader issue of climate change. Jimmy is particularly interested in using field experiments and quasi-experimental methods to answer questions about the deployment of new technologies in the consumption and production of energy.