Nonlinear pricing schedules are common in communication and subscription services and in many utilities, including water, electricity and gas, as a way to recover costs while taking into consideration consumer demand profiles.

The consumer is typically modelled as an individual which maximizes utility with a nonlinear budget constraint. However, consumers could have reference points that will affect their consumption choices.

Based on the gain/loss utility approach, we take the discrete/continuous model of consumer choice that has been widely used for demand analysis under block rates and modify it to include reference-price effects. Since empirical evidence suggests that consumers have a higher awareness of total expenses than of price, we also discuss a model of reference expense.

In particular, we show how loss aversion alters consumption decisions when the consumer treats a higher-than-reference price (or expense) as a loss. Finally, we discuss implications for utility pricing policies and services with nonlinear pricing.

Nonlinear pricing with loss aversion

Thu 11 Jun 2015 12:00pm2:00pm


Room 629, Colin Clark Building (#39)