The Long-Run Elasticity of Electricity Demand: Evidence from Municipal Electric Aggregation
with Tatyana Deryugina
Empirical studies of demand with short sample periods may accurately reflect the short-run consumer response but fail to capture long-run effects. For electricity markets, understanding how consumers respond to electricity prices is essential for predicting the effects of climate change policy and other market regulations. We study the dynamics of residential electricity demand by exploiting price variation arising from a natural experiment: an Illinois community aggregation policy that enabled communities to select new electricity suppliers on behalf of their residents. Participating communities experienced average price decreases in excess of 10 percent in the three years following adoption of a referendum. Using a flexible difference-in-differences matching approach, we estimate a one-year average price elasticity of -0.14 and three-year elasticity of -0.29. We also find compelling evidence that consumers increased usage in anticipation of the price changes. Finally, we estimate a forward-looking demand model and conclude that the long-run price elasticity is no larger than -0.39. Our findings demonstrate the importance of accounting for long-run dynamics when predicting policy effects.
The Structure of Costs and the Duration of Supplier Relationships
[Job Market Paper]
The duration of a supply relationship depends on two types of costs: (i) the transaction cost of switching suppliers and (ii) the cost of being matched to an inefficient supplier when the relationship lasts too long. I develop a model of optimal contract duration that captures this tradeoff, and I provide conditions that identify the underlying cost structure. Latent transaction costs are identified even when the exact supplier selection mechanism is unknown. For a typical procurement good, I estimate the model and find that transaction costs are a significant portion of total costs. I conduct two counterfactual exercises. In the first, I estimate the effects of changing the maximum allowable contract duration, which is a common contracting friction. In the second, I evaluate the impact of reducing transaction costs. This second counterfactual illustrates why quantifying transaction costs is important for accurate welfare analysis.
The Empirical Effects of Minimum Resale Price Maintenance
with David Aron Smith
Revisions requested from The Journal of Law and Economics
This study is the first to estimate the empirical effects of minimum resale price maintenance (RPM) across a broad variety of products. We analyze conflicting theories using an exogenous state-level law change resulting from the 2007 Leegin Supreme Court decision. In states where RPM contracts are treated under the more relaxed rule-of-reason standard, prices increased. Through a series of tests, we find little support for the broad application of any particular theory.
Challenges for Empirical Research on RPM
with David Aron Smith
Review of Industrial Organization
, Vol. 50, No. 2 (2017), 209–220.
This article discusses the empirical challenges that researchers face when demonstrating the existence and effects of resale price maintenance (RPM). We outline three approaches for finding price effects of RPM and the corresponding hurdles in data and methodology. We show that the quantity test that was suggested by Posner (1977; 1981) does not identify the change to welfare when demand-enhancing effects are considered generally. Finally, we present some solutions to the challenge of identifying welfare effects, and we suggest guidelines for future research.
Bias in Reduced-Form Estimates of Pass-Through
with Nathan H. Miller
and Gloria Sheu
, Vol. 123, No. 2 (2014), 200-202.
This paper addresses the conditions under which cost pass-through can be estimated accurately with reduced-form regressions of price on cost. Our main result is that a reduced-form regression of price on costs - the standard methodology for pass-through estimation - does not guarantee a consistent estimate under the usual assumption that observed cost measures are uncorrelated with other determinants of cost. We provide sufficient conditions for consistency, and we derive a formal approximation for the asymptotic bias under the standard assumption of orthogonality. We provide guidance on the conditions under which bias may frustrate inference.
Work in Progress
Contracts as a Barrier to Entry: Evidence from a Newly Deregulated Market
In a newly deregulated market for retail electricity, suppliers offer a discount for signing two-year contracts compared to one-year contracts. The discount anticipates entry in the market; greater entry during the first year of the contract corresponds to a larger discount for a two-year term. The market experiences an expansion phase followed by a maturation phase in which unsuccessful firms exit. As the number of suppliers falls, firms no longer offer a discount on the two-year contract; instead, they charge a premium. The observed pricing behavior is consistent with an incentive to discourage entry, as in Aghion and Bolton (1987).