Faculty of Economics and Business Administration Publications Database

Why do consumers prefer static instead of dynamic pricing plans? An empirical study for a better understanding of the low preferences for time-variant pricing plans

Schlereth, Christian
Schulz, Fabian
Volume: 269
Number: 3
Pages: 1165 - 1179
ISSN-Print: 0377-2217
Link External Source: Online Version
Year: 2018
Keywords: Pricing; Discrete choice experiments; Hierarchical Bayes extended covariate logit model; Price fairness; Electricity

Time-variant pricing plans in electricity markets aim to mitigate mismatches between demand and supply by incentivizing consumers to shift their demand from costly peak to cheaper off-peak times. Their implementation can be manifold; they could depend statically on the time of the day (i.e., time-of-use pricing) or adjust prices dynamically in nearly real time (real-time pricing). If consumers reduced demand in peak times, then they would realize lower prices and providers would operate at lower costs. Still, consumers frequently refuse time-variant pricing plans. The authors develop a new conceptual framework to study and explain this behavior. It supports the optimal choice of time-variant pricing plans by jointly considering price fairness and economic antecedents. In a discrete choice experiment, the authors use a hierarchical Bayes covariate extended logit estimation to measure respondents’ probability of switching from a time-invariant pricing plan to a time-variant pricing plan. The results show that economic antecedents, such as price consciousness and flexibility, have a stronger effect on the choice of a time-variant pricing plan than price fairness considerations; cost insurance is a promising instrument for increasing acceptance of dynamic pricing plans. The results also suggest new ways to target prospective customers.