Understanding Energy Consumer Behavior through Economic AIXperiments
Project duration: 1/2010 – 12/2012
Funded by E.ON ERC
Accurate and nuanced understanding of consumer behavior is critical for the seamless development and implementation of socially-efficient government policy or profit-maximizing firm-level policy in the energy space. Developing such understanding through traditional methods is problematic. Research shows survey-based methods to be inaccurate because of hypothetical bias. Since respondents are aware that filling a survey does not affect their incomes or experience, their responses tend to be poorly thought-out and non-indicative of their true preferences. Using data-based methods to understand consumer behavior is often problematic because of non-availability of quality data and endogeneity issues like omitted variable bias and reverse causality. As a consequence, researchers today are gravitating towards experiments as empirically valid, data-rich methods for understanding economic behavior. Through careful design, research subjects are incentivized to truthfully reveal their preferences, thereby mitigating much of the hypothetical bias that affects survey research. Non-availability of data is not a problem since the experiment generates the data and endogeneity is alleviated by the high level of control in the laboratory environment. A well-designed experiment will supply accurate inference on consumer behavior and responses to changes in energy markets.
The aim of this project is two-fold. First, we are establishing physical and research infrastructure at the Institute for Future Energy Consumer Needs and Behavior (FCN) for the development, execution and analysis of experimental research projects in economics. We are building up a long-term, robust capacity for conducting state-of-the-art experimental research into the economics of energy in both the consumer and producer (and the combined “prosumer”) domains. Our objective, as we set about establishing the research infrastructure, is flexibility. By this, we mean that we are looking at creating competencies in a range of experimental methodologies. Such competencies will allow us to deliver answers on a variety of challenging research assignments over smaller time scales than those that might be found at comparable research institutes.
The second aim of the project is to execute two pilot studies that differ widely in their domains and that require very different methodologies. There are three reasons behind this aim. First, we realize that a new, but ambitious research institute builds up its reputation by establishing a track record for exciting, but yet rigorous research. With this in mind, both our studies are designed using state-of-the-art developments in economics and psychology. We believe that the chosen studies best showcase our commitment to flexibility and our competencies in different methodologies. Successful outcomes will go a long way towards future project acquisitions. Second, these studies, and the numerous challenges they throw up, test the quality of the research infrastructure that we are setting up. They help us to identify weaknesses and strengths and thereby strengthen our experimental infrastructure. Finally, and perhaps most importantly, our research philosophy has always been grounded in the notion that research must attempt to solve real world problems. We look forward to feedback from stakeholders and other interested readers on whether, at least as far as these two studies are concerned, we are succeeding in living up to our philosophy and ambitions.
In the first pilot study, we use a large-scale online choice experiment to analyze consumer valuations of technical energy-saving measures (ESMs) in the house, such as energy-saving light bulbs, triple glazed windows or better wall or roof insulation. We are interested in valuing the various attributes of such ESMs, such as their costs, ease-of-use and environmental friendliness. The answers to these questions are valuable from both a business planning and a government policy perspective. For example, if we find that people are unwilling to pay a premium for environmentally friendly products, but are willing to pay more for products that are recommended by experts, then this implies that advertising strategies that focus on green marketing alone might be misguided and ineffective. Besides which ESM attributes are valued highest by what type of consumers, we find that ESM consumers are susceptible to a certain type of framing, but not to a specific bias that may be expected to emerge from heuristic decision-making in choice experiments (see Figure).
The second pilot study evaluates a local energy auction market using a small-scale economic laboratory experiment, conducted at the experimental economics laboratory of the School of Business and Economics. It shows that a format where multiple bids may be submitted is, in terms of auctioneer’s revenues, much more efficient than a format where only one bid may be submitted. However, the multi-bid format also leads to lower quantities being offered. This is evidence for the theoretically predicted capacity withholding. In our case, this has no effect on prices as competition seems to be strong enough to compensate possible strategic behavior. In all cases we observe convergence to the cost level, supported by information feedback. Another important finding is that most participants had fun in the auction, which points to a possibly high acceptance of the design in the real world.
Project publications
Madlener R., Harmsen – van Hout M.J.W., Rosen C., Ghosh G.S. (2013). Understanding Energy Consumer Behavior through Economic AIXperiments, E.ON Energy Research Center Series, Vol. 5, Issue 1, March (ISSN: 1868-7415).