IDEAS home Printed from https://ideas.repec.org/a/bla/jpbect/v23y2021i6p1287-1311.html
   My bibliography  Save this article

Second‐best pricing for incomplete market segments: Application to electricity pricing

Author

Listed:
  • Nicolas Astier

Abstract

Due to technological, political, or practical considerations, most price mechanisms are not fully differentiated by time, location, and contingency of delivery. Rate or tax designers then face a trade‐off between the costs and benefits of using more complex price schedules. This paper studies the second‐best problem of designing, for a given market segment, a linear pricing schedule with a limited number of distinct prices while facing exogenous constraints within a large and practically relevant family. Interestingly, we find that second‐best prices may be computed using simple machine learning techniques. As an illustration, we apply our framework to retail electricity pricing in California.

Suggested Citation

  • Nicolas Astier, 2021. "Second‐best pricing for incomplete market segments: Application to electricity pricing," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(6), pages 1287-1311, December.
    • Handle: RePEc:bla:jpbect:v:23:y:2021:i:6:p:1287-1311
    DOI: 10.1111/jpet.12499
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/jpet.12499
    Download Restriction: no
    File URL: https://libkey.io/10.1111/jpet.12499?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Paul Joskow & Jean Tirole, 2006. "Retail electricity competition," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 799-815, December.
    2. William Vickrey, 1948. "Some Objections to Marginal-Cost Pricing," Journal of Political Economy, University of Chicago Press, vol. 56(3), pages 218-218.
    3. Raj Chetty, 2009. "Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 451-488, May.
    4. Armstrong, Mark & Doyle, Chris & Vickers, John, 1996. "The Access Pricing Problem: A Synthesis," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 131-150, June.
    5. Katrina Jessoe & David Rapson, 2014. "Knowledge Is (Less) Power: Experimental Evidence from Residential Energy Use," American Economic Review, American Economic Association, vol. 104(4), pages 1417-1438, April.
    6. Lawrence H. Goulder & Roberton C. Williams III, 2003. "The Substantial Bias from Ignoring General Equilibrium Effects in Estimating Excess Burden, and a Practical Solution," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 898-927, August.
    7. Severin Borenstein & Stephen Holland, 2005. "On the Efficiency of Competitive Electricity Markets with Time-Invariant Retail Prices," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 469-493, Autumn.
    8. Jules Dupuit, 1995. "De la mesure de l'utilité des travaux publics (1844)," Revue Française d'Économie, Programme National Persée, vol. 10(2), pages 55-94.
    9. Scott P. Burger, Christopher R. Knittel, Ignacio J. Perez-Arriaga, Ian Schneider, and Frederik vom Scheidt, 2020. "The Efficiency and Distributional Effects of Alternative Residential Electricity Rate Designs," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    10. Guesnerie, R., 1980. "Second-best pricing rules in the Boiteux tradition : Derivation, review and discussion," Journal of Public Economics, Elsevier, vol. 13(1), pages 51-80, February.
    11. P. Bohm, 1967. "On the Theory of "Second Best"," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 34(3), pages 301-314.
    12. Harberger, Arnold C, 1971. "Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay," Journal of Economic Literature, American Economic Association, vol. 9(3), pages 785-797, September.
    13. Kay, J. A., 1980. "The deadweight loss from a tax system," Journal of Public Economics, Elsevier, vol. 13(1), pages 111-119, February.
    14. Koichiro Ito & Takanori Ida & Makoto Tanaka, 2018. "Moral Suasion and Economic Incentives: Field Experimental Evidence from Energy Demand," American Economic Journal: Economic Policy, American Economic Association, vol. 10(1), pages 240-267, February.
    15. Ahmad Faruqui & Sanem Sergici, 2010. "Household response to dynamic pricing of electricity: a survey of 15 experiments," Journal of Regulatory Economics, Springer, vol. 38(2), pages 193-225, October.
    16. Katrina Jessoe & David Rapson, 2015. "Commercial and Industrial Demand Response Under Mandatory Time-of-Use Electricity Pricing," Journal of Industrial Economics, Wiley Blackwell, vol. 63(3), pages 397-421, September.
    17. Kay, John & Keen, Michael, 1988. "Measuring the inefficiences of tax systems," Journal of Public Economics, Elsevier, vol. 35(3), pages 265-287, April.
    18. Mark R. Jacobsen & Christopher R. Knittel & James M. Sallee & Arthur A. van Benthem, 2020. "The Use of Regression Statistics to Analyze Imperfect Pricing Policies," Journal of Political Economy, University of Chicago Press, vol. 128(5), pages 1826-1876.
    19. Paul Joskow & Jean Tirole, 2006. "Retail electricity competition," RAND Journal of Economics, The RAND Corporation, vol. 37(4), pages 799-815, December.
    20. Baumol, William J & Bradford, David F, 1970. "Optimal Departures from Marginal Cost Pricing," American Economic Review, American Economic Association, vol. 60(3), pages 265-283, June.
    21. Martin S. Feldstein, 1972. "Equity and Efficiency in Public Sector Pricing: The Optimal Two-Part Tariff," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 86(2), pages 175-187.
    22. Serge-Christophe Kolm, 1969. "La vérité des prix dans un monde imparfait," Revue Économique, Programme National Persée, vol. 20(4), pages 727-740.
    23. R. G. Lipsey & Kelvin Lancaster, 1956. "The General Theory of Second Best," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 24(1), pages 11-32.
    24. McRae, Shaun D. & Wolak, Frank A., 2020. "Retail Pricing in Colombia to Support the Efficient Deployment of Distributed Generation and Electric Vehicles," IDB Publications (Working Papers) 10141, Inter-American Development Bank.
    25. Mette Bjorndal & Kurt Jornsten, 2001. "Zonal Pricing in a Deregulated Electricity Market," The Energy Journal, , vol. 22(1), pages 51-73, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. François Salanié & Vera Zaporozhets, 2022. "Water allocation, crop choice, and priority services," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(1), pages 140-158, February.
    2. Pichou, Marion & Dussartre, Virginie & Lâasri, Maxime & Keppler, Jan-Horst, 2023. "The value of distributed flexibility for reducing generation and network reinforcement costs," Utilities Policy, Elsevier, vol. 82(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Severin Borenstein & James Bushnell, 2015. "The US Electricity Industry After 20 Years of Restructuring," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 437-463, August.
    2. De Castro, Luciano & Dutra, Joisa, 2013. "Paying for the smart grid," Energy Economics, Elsevier, vol. 40(S1), pages 74-84.
    3. Freier, Julia & von Loessl, Victor, 2022. "Dynamic electricity tariffs: Designing reasonable pricing schemes for private households," Energy Economics, Elsevier, vol. 112(C).
    4. Mier, Mathias & Weissbart, Christoph, 2020. "Power markets in transition: Decarbonization, energy efficiency, and short-term demand response," Energy Economics, Elsevier, vol. 86(C).
    5. Anette Boom & Sebastian Schwenen, 2021. "Is real-time pricing smart for consumers?," Journal of Regulatory Economics, Springer, vol. 60(2), pages 193-213, December.
    6. Carsten Helm & Mathias Mier, 2020. "Steering the Energy Transition in a World of Intermittent Electricity Supply: Optimal Subsidies and Taxes for Renewables Storage," ifo Working Paper Series 330, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    7. Gambardella, Christian & Pahle, Michael, 2018. "Time-varying electricity pricing and consumer heterogeneity: Welfare and distributional effects with variable renewable supply," Energy Economics, Elsevier, vol. 76(C), pages 257-273.
    8. Daniel Adelman & Canan Uçkun, 2019. "Dynamic Electricity Pricing to Smart Homes," Operations Research, INFORMS, vol. 67(6), pages 1520-1542, November.
    9. Cl'emence Alasseur & Ivar Ekeland & Romuald Elie & Nicol'as Hern'andez Santib'a~nez & Dylan Possamai, 2017. "An adverse selection approach to power pricing," Papers 1706.01934, arXiv.org, revised Sep 2019.
    10. Boom, Anette & Schwenen, Sebastian, 2012. "Real-time Pricing in Power Markets: Who Gains?," VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 66062, Verein für Socialpolitik / German Economic Association.
    11. Zhao, Huan, 2011. "Four Market Studies for the Beef and Electric Power Industries," ISU General Staff Papers 201101010800001360, Iowa State University, Department of Economics.
    12. Boom, Anette, 2009. "Vertically integrated firms' investments in electricity generating capacities," International Journal of Industrial Organization, Elsevier, vol. 27(4), pages 544-551, July.
    13. Kayo Murakami & Hideki Shimada & Yoshiaki Ushifusa & Takanori Ida, 2022. "Heterogeneous Treatment Effects Of Nudge And Rebate: Causal Machine Learning In A Field Experiment On Electricity Conservation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(4), pages 1779-1803, November.
    14. Laura Mørch Andersen & Lars Gårn Hansen & Carsten Lynge Jensen & Frank A. Wolak, 2019. "Can Incentives to Increase Electricity Use Reduce the Cost of Integrating Renewable Resources," NBER Working Papers 25615, National Bureau of Economic Research, Inc.
    15. Xuejuan Su, 2015. "Have customers benefited from electricity retail competition?," Journal of Regulatory Economics, Springer, vol. 47(2), pages 146-182, April.
    16. Adélaïde Fadhuile & Daniel Llerena & Béatrice Roussillon, 2023. "Intrinsic motivation to promote the development of renewable energy: a field experiment from household demand," Working Papers 2023-01, Grenoble Applied Economics Laboratory (GAEL).
    17. Allcott, Hunt, 2011. "Rethinking real-time electricity pricing," Resource and Energy Economics, Elsevier, vol. 33(4), pages 820-842.
    18. Robert W. Hahn & Robert D. Metcalfe, 2021. "Efficiency and Equity Impacts of Energy Subsidies," American Economic Review, American Economic Association, vol. 111(5), pages 1658-1688, May.
    19. Ciarreta, Aitor & Espinosa, Maria Paz & Pizarro-Irizar, Cristina, 2023. "Pricing policies for efficient demand side management in liberalized electricity markets," Economic Modelling, Elsevier, vol. 121(C).
    20. Strong, Derek Ryan, 2017. "The Early Diffusion of Smart Meters in the US Electric Power Industry," Thesis Commons 7zprk, Center for Open Science.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jpbect:v:23:y:2021:i:6:p:1287-1311. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/apettea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.