Strategic Demand Response to Dynamic Pricing: A Lab Experiment for the Electricity Market

FCN Working Paper No. 05/2018

38 Pages Posted: 14 Aug 2018

See all articles by Ayse Tugba Atasoy

Ayse Tugba Atasoy

RWTH Aachen University - Institute for Future Energy Consumer Needs and Behavior (FCN)

Marjolein J. W. Harmsen - van Hout

Lehrstuhl für Wirtschaftswissenschaften, insb. Energieökonomik; Institute for Future Energy Consumer Needs and Behavior (FCN); E.ON Energy Research Center; RWTH Aachen

Reinhard Madlener

RWTH Aachen University

Date Written: April 2018

Abstract

Despite the efforts of restructuring power markets over the last decades, the lack of demand response in the retail electricity markets remains a significant concern. Possible demand response would help to reduce prices and volatility by better matching supply and demand through improved price signals. In this paper we develop a laboratory tool to experimentally investigate the demand response in the electricity market. The baseline treatment constitutes a two-period ‘wait-or-buy’ game with an exogenous first period, an automated supplier, and twenty subject buyers. While the seller offers a fixed number of a product in the market, consumers decide on purchasing the product immediately or waiting until the next period, taking (i) price uncertainty and (ii) inventory risk into account. This treatment captures demand response in the retail market with scarce products. We design an additional treatment by removing the inventory constraint and introducing a devaluation rule, where consumers only bear the price risk – thus mimicking the demand response in the electricity market. We find that in both retail and electricity market treatments consumers play on average the equilibrium predictions and buy strategically. However, there are systematic deviations from rationality in both settings, i.e., consumers buy too soon or wait too long.

Keywords: Demand Response, Electricity, Dynamic Pricing, Strategic Behavior

JEL Classification: C92, D01, D81, M11, Q31

Suggested Citation

Atasoy, Ayse Tugba and Harmsen - van Hout, Marjolein J. W. and Madlener, Reinhard, Strategic Demand Response to Dynamic Pricing: A Lab Experiment for the Electricity Market (April 2018). FCN Working Paper No. 05/2018. Available at SSRN: https://ssrn.com/abstract=3221747 or http://dx.doi.org/10.2139/ssrn.3221747

Ayse Tugba Atasoy (Contact Author)

RWTH Aachen University - Institute for Future Energy Consumer Needs and Behavior (FCN) ( email )

Mathieustrasse 6
Aachen, 52074
Germany

Marjolein J. W. Harmsen - van Hout

Lehrstuhl für Wirtschaftswissenschaften, insb. Energieökonomik; Institute for Future Energy Consumer Needs and Behavior (FCN); E.ON Energy Research Center; RWTH Aachen ( email )

Aachen
Germany

HOME PAGE: http://www.eonerc.rwth-aachen.de/aw/cms/website/themen/~shg/fcn/lang/en/

Reinhard Madlener

RWTH Aachen University ( email )

School of Business and Economics / E.ON ERC
Mathieustraße 10
Aachen, 52074
Germany
+49 241 80 49 820 (Phone)
+49 241 80 49 829 (Fax)

HOME PAGE: http://www.eonerc.rwth-aachen.de/fcn

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