IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v69y2018icp59-70.html
   My bibliography  Save this article

The effect of price on electricity contract choice

Author

Listed:
  • Vesterberg, Mattias

Abstract

I explore how households switch between fixed-price and variable-price electricity contracts in response to variations in price and temperature, conditional on previous contract choice. Using panel data with roughly 54,000 Swedish households, a dynamic probit model is estimated. The results suggest that the choice of contract exhibits substantial state dependence, with an estimated marginal effect of previous contract choice of 0.96, and that the short-run effects of variation in prices and temperature on the choice of electricity contract are small. Further, the state dependence and price responsiveness are similar across housing types, income levels and other dimensions. A plausible explanation of these results is that transaction costs are perceived to be larger than the relatively small cost savings from switching between contracts.

Suggested Citation

  • Vesterberg, Mattias, 2018. "The effect of price on electricity contract choice," Energy Economics, Elsevier, vol. 69(C), pages 59-70.
    • Handle: RePEc:eee:eneeco:v:69:y:2018:i:c:p:59-70
    DOI: 10.1016/j.eneco.2017.10.039
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988317303821
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.eneco.2017.10.039?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
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Rabe-Hesketh, Sophia & Skrondal, Anders, 2013. "Avoiding biased versions of Wooldridge’s simple solution to the initial conditions problem," Economics Letters, Elsevier, vol. 120(2), pages 346-349.
    2. Littlechild, Stephen, 2006. "Competition and contracts in the Nordic residential electricity markets," Utilities Policy, Elsevier, vol. 14(3), pages 135-147, September.
    3. Dhillon, Upinder S & Shilling, James D & Sirmans, C F, 1987. "Choosing between Fixed and Adjustable Rate Mortgages: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(2), pages 260-267, May.
    4. John Y. Campbell & João F. Cocco, 2003. "Household Risk Management and Optimal Mortgage Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1449-1494.
    5. Meredith Fowlie & Michael Greenstone & Catherine Wolfram, 2015. "Are the Non-monetary Costs of Energy Efficiency Investments Large? Understanding Low Take-Up of a Free Energy Efficiency Program," American Economic Review, American Economic Association, vol. 105(5), pages 201-204, May.
    6. Jeffrey M. Wooldridge, 2005. "Simple solutions to the initial conditions problem in dynamic, nonlinear panel data models with unobserved heterogeneity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(1), pages 39-54, January.
    7. Hunt Allcott, 2011. "Consumers' Perceptions and Misperceptions of Energy Costs," American Economic Review, American Economic Association, vol. 101(3), pages 98-104, May.
    8. Anders Skrondal & Sophia Rabe-Hesketh, 2014. "Handling initial conditions and endogenous covariates in dynamic/transition models for binary data with unobserved heterogeneity," Journal of the Royal Statistical Society Series C, Royal Statistical Society, vol. 63(2), pages 211-237, February.
    9. Monica Paiella & Alberto Franco Pozzolo, 2007. "Choosing between Fixed- and Adjustable-Rate Mortgages," Palgrave Macmillan Books, in: Sumit Agarwal & Brent W. Ambrose (ed.), Household Credit Usage, chapter 0, pages 219-236, Palgrave Macmillan.
    10. Karen Palmer & Margaret Walls, 2015. "Limited Attention and the Residential Energy Efficiency Gap," American Economic Review, American Economic Association, vol. 105(5), pages 192-195, May.
    11. Ketterer, Janina C., 2014. "The impact of wind power generation on the electricity price in Germany," Energy Economics, Elsevier, vol. 44(C), pages 270-280.
    12. Koichiro Ito, 2014. "Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing," American Economic Review, American Economic Association, vol. 104(2), pages 537-563, February.
    13. Samuelson, William & Zeckhauser, Richard, 1988. "Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
    14. Gary Chamberlain, 1980. "Analysis of Covariance with Qualitative Data," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 47(1), pages 225-238.
    15. Mark B. Stewart, 2007. "The interrelated dynamics of unemployment and low-wage employment," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(3), pages 511-531.
    16. Daniel Kahneman & Jack L. Knetsch & Richard H. Thaler, 1991. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter.
    17. Severin Borenstein, 2012. "The Redistributional Impact of Nonlinear Electricity Pricing," American Economic Journal: Economic Policy, American Economic Association, vol. 4(3), pages 56-90, August.
    18. Mattias Vesterberg and Chandra Kiran B. Krishnamurthy, 2016. "Residential End-use Electricity Demand: Implications for Real Time Pricing in Sweden," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).
    19. Wiji Arulampalam & Mark B. Stewart, 2009. "Simplified Implementation of the Heckman Estimator of the Dynamic Probit Model and a Comparison with Alternative Estimators," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(5), pages 659-681, October.
    20. Juliusson, E. Asgeir & Gamble, Amelie & Garling, Tommy, 2007. "Loss aversion and price volatility as determinants of attitude towards and preference for variable price in the Swedish electricity market," Energy Policy, Elsevier, vol. 35(11), pages 5953-5957, November.
    21. Chris M. Wilson & Catherine Waddams Price, 2010. "Do consumers switch to the best supplier?," Oxford Economic Papers, Oxford University Press, vol. 62(4), pages 647-668, October.
    22. Ericson, Torgeir, 2011. "Households' self-selection of dynamic electricity tariffs," Applied Energy, Elsevier, vol. 88(7), pages 2541-2547, July.
    23. Klemperer, Paul D, 1987. "Entry Deterrence in Markets with Consumer Switching Costs," Economic Journal, Royal Economic Society, vol. 97(388a), pages 99-117, Supplemen.
    24. Krishnamurthy, Chandra Kiran B. & Kriström, Bengt, 2015. "A cross-country analysis of residential electricity demand in 11 OECD-countries," Resource and Energy Economics, Elsevier, vol. 39(C), pages 68-88.
    25. David Revelt and Kenneth Train., 2000. "Customer-Specific Taste Parameters and Mixed Logit: Households' Choice of Electricity Supplier," Economics Working Papers E00-274, University of California at Berkeley.
    26. Andrew A. Goett & Kathleen Hudson & Kenneth E. Train, 2000. "Customers' Choice Among Retail Energy Suppliers: The Willingness-to-Pay for Service Attributes," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 1-28.
    27. Woo, C.K. & Horowitz, I. & Moore, J. & Pacheco, A., 2011. "The impact of wind generation on the electricity spot-market price level and variance: The Texas experience," Energy Policy, Elsevier, vol. 39(7), pages 3939-3944, July.
    28. Gamble, Amelie & Juliusson, E. Asgeir & Gärling, Tommy, 2009. "Consumer attitudes towards switching supplier in three deregulated markets," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 38(5), pages 814-819, October.
    29. Yang, Yingkui, 2014. "Understanding household switching behavior in the retail electricity market," Energy Policy, Elsevier, vol. 69(C), pages 406-414.
    30. Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 375-394.
    31. Ek, Kristina & Söderholm, Patrik, 2008. "Households' switching behavior between electricity suppliers in Sweden," Utilities Policy, Elsevier, vol. 16(4), pages 254-261, December.
    32. Nesbakken, Runa, 1999. "Price sensitivity of residential energy consumption in Norway," Energy Economics, Elsevier, vol. 21(6), pages 493-515, December.
    33. Mundlak, Yair, 1978. "On the Pooling of Time Series and Cross Section Data," Econometrica, Econometric Society, vol. 46(1), pages 69-85, January.
    34. Defeuilley, Christophe, 2009. "Retail competition in electricity markets," Energy Policy, Elsevier, vol. 37(2), pages 377-386, February.
    35. Kazukauskas, Andrius & Broberg, Thomas, 2016. "Perceptions and inattention in private electricity consumption," CERE Working Papers 2016:2, CERE - the Center for Environmental and Resource Economics, revised 03 Oct 2023.
    36. Akay, Alpaslan, 2009. "The Wooldridge Method for the Initial Values Problem Is Simple: What About Performance?," IZA Discussion Papers 3943, Institute of Labor Economics (IZA).
    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. Andreas Ziegler, 2018. "Heterogeneous preferences and the individual change to alternative electricity contracts," MAGKS Papers on Economics 201827, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    2. Tsao, Yu-Chung & Vu, Thuy-Linh, 2019. "Power supply chain network design problem for smart grid considering differential pricing and buy-back policies," Energy Economics, Elsevier, vol. 81(C), pages 493-502.
    3. Lanot, Gauthier & Vesterberg, Mattias, 2021. "The price elasticity of electricity demand when marginal incentives are very large," Energy Economics, Elsevier, vol. 104(C).
    4. Brännlund, Runar & Vesterberg, Mattias, 2021. "Peak and off-peak demand for electricity: Is there a potential for load shifting?," Energy Economics, Elsevier, vol. 102(C).
    5. Tomasz Rokicki & Piotr Bórawski & Barbara Gradziuk & Piotr Gradziuk & Aldona Mrówczyńska-Kamińska & Joanna Kozak & Danuta Jolanta Guzal-Dec & Kamil Wojtczuk, 2021. "Differentiation and Changes of Household Electricity Prices in EU Countries," Energies, MDPI, vol. 14(21), pages 1-21, October.
    6. Ziegler, Andreas, 2020. "Heterogeneous preferences and the individual change to alternative electricity contracts," Energy Economics, Elsevier, vol. 91(C).
    7. Fontana, Magda & Iori, Martina & Nava, Consuelo Rubina, 2019. "Switching behavior in the Italian electricity retail market: Logistic and mixed effect Bayesian estimations of consumer choice," Energy Policy, Elsevier, vol. 129(C), pages 339-351.

    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. Vesterberg, Mattias, 2017. "The effect of price on electricity contract choice," Umeå Economic Studies 941, Umeå University, Department of Economics.
    2. Gauthier Lanot & Mattias Vesterberg, 2019. "An empirical model of the decision to switch between electricity price contracts," Journal of Business Analytics, Taylor & Francis Journals, vol. 2(1), pages 24-46, January.
    3. Vesterberg, Mattias, 2017. "Heterogeneity in price responsiveness of electricity: Contract choice and the role of media coverage," Umeå Economic Studies 940, Umeå University, Department of Economics.
    4. Ndebele, Tom & Marsh, Dan & Scarpa, Riccardo, 2019. "Consumer switching in retail electricity markets: Is price all that matters?," Energy Economics, Elsevier, vol. 83(C), pages 88-103.
    5. Vesterberg, Mattias, 2017. "Power to the people: Electricity demand and household behavior," Umeå Economic Studies 942, Umeå University, Department of Economics.
    6. Alexander Mosthaf & Thorsten Schank & Claus Schnabel, 2014. "Low-wage employment versus unemployment: Which one provides better prospects for women?," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 3(1), pages 1-17, December.
    7. Manudeep Bhuller & Christian N. Brinch & Sebastian Königs, 2017. "Time Aggregation and State Dependence in Welfare Receipt," Economic Journal, Royal Economic Society, vol. 127(604), pages 1833-1873, September.
    8. Nogata, Daisuke, 2022. "Determinants of household switching between natural gas suppliers: Evidence from Japan," Utilities Policy, Elsevier, vol. 76(C).
    9. Chrysanthou, Georgios Marios & Guilló, María Dolores, 2016. "The Dynamics of Heterogeneous Political Party Support and Egocentric Economic Evaluations: the Scottish Case," QM&ET Working Papers 16-3, University of Alicante, D. Quantitative Methods and Economic Theory.
    10. Lanot, Gauthier & Vesterberg, Mattias, 2021. "The price elasticity of electricity demand when marginal incentives are very large," Energy Economics, Elsevier, vol. 104(C).
    11. Lionel WILNER, 2019. "The Dynamics of Individual Happiness," Working Papers 2019-18, Center for Research in Economics and Statistics.
    12. Prieto Suarez, Joaquin, 2021. "Poverty traps and affluence shields: modelling the persistence of income position in Chile," LSE Research Online Documents on Economics 110719, London School of Economics and Political Science, LSE Library.
    13. Stephen Littlechild, 2020. "An Overall Customer Satisfaction score for GB energy suppliers," Working Papers EPRG2027, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    14. Carlos Gradín & Olga Cantó, 2009. "Why are child poverty rates so persistently high in Spain?," Working Papers 123, ECINEQ, Society for the Study of Economic Inequality.
    15. Erdogan, Murside Rabia & Camgoz, Selin Metin & Karan, Mehmet Baha & Berument, M. Hakan, 2022. "The switching behavior of large-scale electricity consumers in The Turkish electricity retail market," Energy Policy, Elsevier, vol. 160(C).
    16. Sebastian Königs, 2013. "The Dynamics of Social Assistance Benefit Receipt in Germany: State Dependence Before and After the Hartz Reforms," OECD Social, Employment and Migration Working Papers 136, OECD Publishing.
    17. Krishnamurthy, Chandra Kiran B. & Vesterberg, Mattias & Böök, Herman & Lindfors, Anders V. & Svento, Rauli, 2018. "Real-time pricing revisited: Demand flexibility in the presence of micro-generation," Energy Policy, Elsevier, vol. 123(C), pages 642-658.
    18. Georgios Marios Chrysanthou, 2021. "A Multiple Cohort Study of the Gender Gradient of Life Satisfaction during Adolescence: Longitudinal Evidence from Great Britain," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 83(6), pages 1341-1376, December.
    19. Peter D. Lunn, 2013. "Telecommunications Consumers: A Behavioral Economic Analysis," Journal of Consumer Affairs, Wiley Blackwell, vol. 47(1), pages 167-189, April.
    20. Xiaoping He & David Reiner, 2015. "Why Do More British Consumers Not Switch Energy Suppliers? The Role of Individual Attitudes," Working Papers EPRG 1515, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.

    More about this item

    Keywords

    Electricity contract choice; Residential electricity demand; Demand flexibility; Transaction costs;
    All these keywords.

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • D10 - Microeconomics - - Household Behavior - - - General
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

    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:eee:eneeco:v:69:y:2018:i:c:p:59-70. 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: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eneco .

    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.