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The Neoclassical Model of Consumer Demand with Identically Priced Commodities: An Application to Time-of-Use Electricity Pricing

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  • Douglas W. Caves
  • Laurits R. Christensen
  • Joseph A. Herriges

Abstract

Hick's theorem permits aggregation of commodities when their relative prices are fixed, but, contrary to a widely expressed view, it does not require that they be aggregated. Even where commodities have identical prices, all of their income elasticities and many of their price elasticities can be identified through econometric estimation. Our empirical illustration uses the generalized Leontief indirect utility function with data from the Wisconsin Residential Electricity Pricing Experiment. We model the demand for six commodities although there are only two unique prices.

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  • Douglas W. Caves & Laurits R. Christensen & Joseph A. Herriges, 1987. "The Neoclassical Model of Consumer Demand with Identically Priced Commodities: An Application to Time-of-Use Electricity Pricing," RAND Journal of Economics, The RAND Corporation, vol. 18(4), pages 564-580, Winter.
    • Handle: RePEc:rje:randje:v:18:y:1987:i:winter:p:564-580
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    Cited by:

    1. Woo, C.K. & Liu, Y. & Zarnikau, J. & Shiu, A. & Luo, X. & Kahrl, F., 2018. "Price elasticities of retail energy demands in the United States: New evidence from a panel of monthly data for 2001–2016," Applied Energy, Elsevier, vol. 222(C), pages 460-474.
    2. Massimo Filippini, 1995. "Swiss Residential Demand for Electricity by Time-of-Use: An Application of the Almost Ideal Demand System," The Energy Journal, , vol. 16(1), pages 27-39, January.
    3. Woo, C.K. & Shiu, A. & Liu, Y. & Luo, X. & Zarnikau, J., 2018. "Consumption effects of an electricity decarbonization policy: Hong Kong," Energy, Elsevier, vol. 144(C), pages 887-902.
    4. Burns, Kelly & Mountain, Bruce, 2021. "Do households respond to Time-Of-Use tariffs? Evidence from Australia," Energy Economics, Elsevier, vol. 95(C).
    5. Woo, C.K. & Tishler, A. & Zarnikau, J. & Chen, Y., 2021. "Average residential outage cost estimates for the lower 48 states in the US," Energy Economics, Elsevier, vol. 98(C).
    6. Moschini, Giancarlo, 1991. "Testing for Preference Change in Consumer Demand: An Indirectly Separable, Semiparametric Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(1), pages 111-117, January.
    7. Mostafa Baladi, S. & Herriges, Joseph A. & Sweeney, Thomas J., 1998. "Residential response to voluntary time-of-use electricity rates," Resource and Energy Economics, Elsevier, vol. 20(3), pages 225-244, September.
    8. Kapeller, Rudolf & Cohen, Jed J. & Kollmann, Andrea & Reichl, Johannes, 2023. "Incentivizing residential electricity consumers to increase demand during periods of high local solar generation," Energy Economics, Elsevier, vol. 127(PA).
    9. Woo Chi-Keung & Jay Zarnikau & Alice Shiu & Raymond Li, 2017. "Winter Residential Optional Dynamic Pricing: British Columbia," The Energy Journal, , vol. 38(5), pages 115-128, September.
    10. J. G. Hirschberg, 2000. "Modelling time of day substitution using the second moments of demand," Applied Economics, Taylor & Francis Journals, vol. 32(8), pages 979-986.
    11. Cappers, Peter A. & Todd-Blick, Annika, 2021. "Heterogeneity in own-price residential customer demand elasticities for electricity under time-of-use rates: Evidence from a randomized-control trial in the United States," Utilities Policy, Elsevier, vol. 73(C).
    12. Herter, Karen & Wayland, Seth, 2010. "Residential response to critical-peak pricing of electricity: California evidence," Energy, Elsevier, vol. 35(4), pages 1561-1567.
    13. Filippini, Massimo, 1995. "Electricity demand by time of use An application of the household AIDS model," Energy Economics, Elsevier, vol. 17(3), pages 197-204, July.
    14. Stephen P. Holland & Erin T. Mansur, 2006. "The Short-Run Effects of Time-Varying Prices in Competitive Electricity Markets," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 127-156.
    15. Woo, C.K. & Sreedharan, P. & Hargreaves, J. & Kahrl, F. & Wang, J. & Horowitz, I., 2014. "A review of electricity product differentiation," Applied Energy, Elsevier, vol. 114(C), pages 262-272.
    16. Mountain, Dean C. & Lawson, Evelyn L., 1995. "Some initial evidence of Canadian responsiveness to time-of-use electricity rates: Detailed daily and monthly analysis," Resource and Energy Economics, Elsevier, vol. 17(2), pages 189-212, August.

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