Another Victory for the Behavioral Economists | Energy Institute Blog

Consumers Do Reduce Consumption When the Price Goes Up

The first result in the paper validates our basic Econ 1 models. During the event windows, the customers in the treated group consumed on average 12 percent less than the customers in the control group. So, higher prices imply less consumption. Check.

It’s also interesting to see these reductions because the DRP’s customers were given very little time to react. Under many utilities’ Critical Peak Pricing programs, for example, customers are alerted the day before a price change, but the DRP sent out the text messages one hour before the event. In California, real-time prices are a lot more volatile than day-ahead, so we’d ideally like customers to be exposed to real-time prices as they reflect the most up-to-date information about the electricity system.

Consumers Are Extraordinarily Insensitive to the Price Level

Unfortunately, things stop looking quite as good for Econ 1 if you zero in on the responses to different events. Recall that the price bump varied by a factor of 60: from 5 cents to 3 DOLLARS. Gillan shows that the reductions did not vary by much at all – around 11 percent reductions for 5 cents and 13 percent for 3 dollars. That means people were behaving as though they were really insensitive to the price, which is hard to square with the fact that they reduced by 12 percent across all the events.

Gillan attributes this insensitivity to the price level to what the behavioral economists call “scope neglect.” Previous research has shown, for example, that people are willing to donate the same amount of money to save 2,000 endangered birds as 200,000. Yes, I care about endangered birds, but I have trouble thinking about the difference between 2,000 and 200,000. In the demand response context, Gillan’s results suggest that people pay attention to the fact that there’s a change in price, but not the size of the change.

Gillan also finds that people responded less to a separate set of messages that had no price change – so they’re not simply reducing because they see a message. It seems that the hurdle lies in translating the price displayed to the possible savings.

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Another Victory for the Behavioral Economists – Energy Institute Blog.