Does Non-Linear Pricing Work? - Evidence from Residential Water Consumption in GuangDong Province

33 Pages Posted: 9 Nov 2017 Last revised: 2 Nov 2018

See all articles by Da Zhao

Da Zhao

Fudan University

Jim Huangnan Shen

University of London, School of Oriental and African Studies (SOAS), Economics; Center for International Development, Harvard Kennedy School, Harvard University

Chien-Chiang Lee

Nanchang University

Date Written: November 7, 2017

Abstract

Non-linear pricing has been widely used in many aspects of daily life, such as water, gas and tax rates. Nevertheless, aware of the complexity of pricing signals, consumers might not respond in accordance with what traditional pricing theory predicts, which would in turn generate misguiding signals from the pricing policies enacted by the government. Moreover, it also remains controversial whether non-linear pricing would discourage consumption. Based on models developed by Ito (2014), we employ both macro water pricing data and the monthly water consumption data of individual households from several cities in GuangDong Province to investigate prices as consumers perceived them. The empirical evidence reveals that the water consumption level of an individual household in any period is mainly contingent upon the average price level in the previous period, not upon the marginal prices or expected marginal prices in that period. We calculate this two-period price elasticity as -0.24. This implies that the implementation of a non-linear water pricing strategy (a ladder water-pricing strategy) fails to lower the water consumption of individual households, but raising the level of average pricing manages to do so. Our empirical results are also robust among households with different income levels and educational levels as well as different levels of water use. The conclusions to be drawn from this study can have far-reaching implications for tax policy designs, energy pricing designs, telecommunication menu pricing strategy formulations, and so on.

Keywords: Nonlinear Pricing, Water Consumptions, Perceived Prices

JEL Classification: D12, L11, L94

Suggested Citation

Zhao, Da and Shen, Jim Huangnan and Lee, Chien-Chiang, Does Non-Linear Pricing Work? - Evidence from Residential Water Consumption in GuangDong Province (November 7, 2017). Available at SSRN: https://ssrn.com/abstract=3066781 or http://dx.doi.org/10.2139/ssrn.3066781

Da Zhao

Fudan University ( email )

Beijing West District Baiyun Load 10th
Shanghai, 100045
China

Jim Huangnan Shen (Contact Author)

University of London, School of Oriental and African Studies (SOAS), Economics ( email )

London, WC1E 7HU
United Kingdom

Center for International Development, Harvard Kennedy School, Harvard University ( email )

One Eliot Street Building
79 JFK Street
Cambridge, MA 02138
United States

Chien-Chiang Lee

Nanchang University ( email )

999 Xuefu Avenue
Hong Gu Tan New District
Nanchang, Jiangxi 330031
China
330031 (Fax)

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