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An empirical model of the decision to switch between electricity price contracts

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Abstract
We present a novel model for a time series of individual binary decisions which depends on the history of prices. The model is based on the Bayesian learning procedure which is at the core of sequential decision making. We show that the model capture dependence on past events and past priors in a straightforward fashion, the model capture some dependence on initial condition, here in the form of the prior at the start of the decision period, and that estimation through maximum likelihood is straightforward. We estimate the parameters of the model on a sample of Swedish households who have to decide over time between competing electricity contracts. The estimated parameters suggest that households respond to prices by switching between contracts, and that the response can be rather substantial for alternative price processes

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  • Lanot, Gauthier & Vesterberg, Mattias, 2017. "An empirical model of the decision to switch between electricity price contracts," Umeå Economic Studies 951, Umeå University, Department of Economics.
    • Handle: RePEc:hhs:umnees:0951
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    Cited by:

    1. Lanot, Gauthier & Vesterberg, Mattias, 2021. "The price elasticity of electricity demand when marginal incentives are very large," Energy Economics, Elsevier, vol. 104(C).
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    More about this item

    Keywords

    Price; Contract Choice; Bayesian Learning; Time Series; Binary Decision; Survival analysis;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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