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Neoclassical Model of Consumer Demand with Identically Priced Commodities; And An Application to Time of Use Electricity Pricing

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  • Caves, Douglas W.
  • Christensen, L. R.
  • Herriges, Joseph A.

Abstract

Hick's (1936) theorem allows 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 in cases in which commodities have identical prices, all of their income elasticities and many of their price elasticities can be identified through econometric estimation. Using data from the Wisconsin Residential Electricity Pricing Experiment, it is demonstrated how a judiciously chosen level of aggregation can shed light on questions of interest without making the analysis unmanageable. Ninety-six electricity commodities can be distinguished by time of use. Partial Hicksian aggregation is performed. The generalized Leontief indirect utility function is used to estimate consumer preferences for 6 electricity commodities although there are only 2 unique prices. It is found that there are significant substitution possibilities between the Hicksian aggregates of peak and offpeak electricity consumption.

Suggested Citation

  • Caves, Douglas W. & Christensen, L. R. & Herriges, Joseph A., 1987. "Neoclassical Model of Consumer Demand with Identically Priced Commodities; And An Application to Time of Use Electricity Pricing," Staff General Research Papers Archive 10793, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:10793
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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. Henley, A & Peirson , J, "undated". "Energy Pricing and Temperature Interaction: British Experimental Evidence," Discussion Papers 9616, Department of Economics, University of Wales, Aberystwyth.
    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. Henley, Andrew & Peirson, John, 1998. "Residential energy demand and the interaction of price and temperature: British experimental evidence," Energy Economics, Elsevier, vol. 20(2), pages 157-171, April.
    17. 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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