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Demand Elasticity in the Italian Power Market: a Bayesian Experiment under dual pricing scheme

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  • Maria Chiara D'errico

Abstract

This study run experiment aiming to provide a flexible and analytically elegant framework to reliably estimate the price elasticity of electricity demand. Inference pertains to the demand at hourly level in the Italian wholesale electricity market and uses individual demand bid data. Individuals' bids represent the ex-ante willingness to pay and thus allows for constructing a market demand grounded in the consumer behavior theory, by exploiting the duality approach. Bayesian econometric estimation is applied, relaxing homoskedasticity assumptions of the traditional linear regression model. It allows to identify robust results, showing that elasticity varies significantly among hours of the day, zone segmentation as well as the level of equilibrium price. Bayesian inference provides also the opportunity to include prior information sourced from previous studies and the institutional struc- ture governing the agents' behavior. This prior information involves some degree of uncertainty, for this reason Bayesian approach assigns it a probability distribution. Using Bayes rule, prior information are then updated according to the observed data. Results validate the market reform designed to foster competition and increase wel- fare even through the time-varying pricing schemes that trigger the consumers' price reaction.

Suggested Citation

  • Maria Chiara D'errico, 2020. "Demand Elasticity in the Italian Power Market: a Bayesian Experiment under dual pricing scheme," Review of Economics and Institutions, Università di Perugia, vol. 11(1-2).
    • Handle: RePEc:pia:review:v:11:y:2020:i:1-2:n:3
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    More about this item

    Keywords

    Demand Elasticity; Bayesian Heteroskedastic SUR Model; Power Market.;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
    • Q49 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Other

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