Kahn-Lang, Jenya “Competing for (In)attention: Price Discrimination in Residential Electricity Markets” (November 2022) | WP-333 | Blog

Abstract:
This paper studies the causes and consequences of pricing heterogeneity in markets for residential electricity, a nearly homogeneous good. I uncover adverse efficiency and distributional impacts of competition when consumers face heterogeneous search frictions. I show that consumers pay different prices for electricity in the same market, with low-income households and marginalized communities paying systematically higher electricity prices than their higher-income counterparts. These pricing patterns are consistent with a model of firms price discriminating on search frictions through marketing. Using data from Baltimore, I estimate a structural model that shows that this marketing leads to an annual welfare loss of 14% of industry-wide variable costs. Despite having only slightly larger search frictions, low-income households pay substantially higher prices than high-income households primarily due to lower marketing costs in low-income communities. Auxiliary analyses rule out alternative explanations, such as differing underpayment risks or preferences for differentiated product attributes. The model demonstrates that policy implications are nuanced: while marketing restrictions can increase consumer surplus, they may also increase average market prices by reducing consumers’ attention to their own prices.