Doctoral Dissertation Research in Economics: Direct Marketing as a Form of Price Discrimination in Residential Electricity Choice Markets

University Of California-Berkeley, Berkeley CA

Investigators

Abstract

Many U.S. states opened residential electricity markets to competition from for-profit companies between 1996 and 2007. Prior to this time, most households in the same town or city paid the same price for electricity. Under competition, some households pay prices triple the prices of other households in their same town or city, and households in low-income neighborhoods and vulnerable communities tend to pay particularly high prices. This research will investigate why low-income households tend to pay more than other households in a few Northeast U.S. electricity markets. Among other reasons, it will explore the role of door-to-door and other in-person marketing that is targeted at certain geographic areas or communities. The project aims to help improve policy and reduce inequality by analyzing the potential benefits and costs of additional consumer protection policies. This research will analyze distributional impacts of retail electricity restructuring. In particular, it will explore the hypothesis that heterogeneous barriers to search and costly in-person marketing create a dual market where firms price discriminate on consumers’ barriers to search. Firms may achieve this by offering low prices online for consumers who search and directly marketing higher prices to consumers who do not search. The project team will conduct a survey and randomized information intervention of 1,000 households in Maryland and Connecticut. The survey aims to answer two research questions: 1. Why do households sign up with direct marketers at high prices when lower prices exist? 2. Why do low-income households sign up for electricity products at higher prices, on average, than high-income households? The randomized information intervention will enable analysis of how search, switching, and price outcomes change with reductions in search costs and biases about the benefits of searching. The survey will also explore differences across sociodemographic groups in preferences for bundled attributes, inertia, search costs, belief biases, and perceptions of electricity marketers. It is important to differentiate between these mechanisms since they have differing implications for welfare and policy prescriptions. This research aims to build on existing literature on unexplained consumer decision error in residential electricity markets by identifying the key drivers of this decision error and exploring strategic firm response in this context. In addition, this project may contribute to the broader economic literature in two ways. First, it will assess a new explanation for price dispersion. Second, it will identify the impact of barriers to search and direct marketing on retail price differences across socioeconomic groups in a particularly clean setting that is free from common confounders, such as differences in payment risk. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.