Prof. Severin Borenstein of the Haas School of Business, University of California, Berkeley. Abstract: It is straightforward to evaluate how a perfectly-optimizing, perfectly-informed
customer will respond to a non-linear price schedule, but such a customer is rare. In the
common case of increasing-block pricing of water and electricity, consumers do not know
what marginal price they face during a billing period, because they do not know what
demand shocks will occur during the period. If consumers instead set optimal behavioral
rules (e.g., turn o? lights in unused rooms, set the A/C to 74 degrees, replace incandescent
lights with CFLs) based on the distribution of possible marginal prices they will face, their
consumption will not re?ect response to the discrete jumps in the price schedule. Using
data from a large electricity utility, I show that the empirical distribution of consumption
quantities is not consistent with consumers accurately knowing and responding to the
marginal price they will face. I then estimate the price elasticity of demand using a panel
of household observations at two-year intervals, identifying elasticity from the changes in
the increasing-block price schedule. The results suggest that most consumers are probably
responding to the expected marginal price or even less precise information about what
marginal price they will face. The results are di?cult to reconcile with the common
approach of estimating demand elasticity from the response to an increasing-block price
structure using a discrete-continuous choice model. [Full Article]

About the Speaker: Severin Borenstein is E.T. Grether Professor of Business Administration and Public Policy at the Haas School of Business and Director of the University of California Energy Institute, where he is also co-Director of the Institute's Center for the Study of Energy Markets. He received his A.B. from U.C. Berkeley in 1978 and Ph.D. in Economics from M.I.T. in 1983. His research focuses on business competition, strategy, and regulation. He has published extensively on the airline industry, the oil and gasoline industries, and electricity markets. His current research projects include empirical and theoretical work on competition in gasoline markets; market power and pricing issues in restructured electricity markets; strategic pricing and financial distress in the airline industry; and the incentives of firms to cut costs and improve efficiency.