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

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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.

Suggested Citation

  • Atasoy, Ayse Tugba & Harmsen-van Hout, Marjolein & Madlener, Reinhard, 2018. "Strategic Demand Response to Dynamic Pricing: A Lab Experiment for the Electricity Market," FCN Working Papers 5/2018, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Jan 2020.
    • Handle: RePEc:ris:fcnwpa:2018_005
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    Cited by:

    1. Wolff, Stefanie & Madlener, Reinhard, 2019. "Charged up? Preferences for Electric Vehicle Charging and Implications for Charging Infrastructure Planning," FCN Working Papers 3/2019, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    2. Specht, Jan Martin & Madlener, Reinhard, 2018. "Business Models for Energy Suppliers Aggregating Flexible Distributed Assets and Policy Issues Raised," FCN Working Papers 7/2018, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    3. Liu, Xueying & Madlener, Reinhard, 2021. "The sky is the limit: Assessing aircraft market diffusion with agent-based modeling," Journal of Air Transport Management, Elsevier, vol. 96(C).
    4. Liu, Xueying & Madlener, Reinhard, 2019. "Get Ready for Take-Off: A Two-Stage Model of Aircraft Market Diffusion," FCN Working Papers 15/2019, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).

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    More about this item

    Keywords

    Demand Response; Electricity; Dynamic Pricing; Strategic Behavior;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management
    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices

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