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Do Energy Prices Influence Buying Behavior?

Le coût de l’énergie influence-t-il les comportements d’achat ? copy vchal
Published on
06 December 2021

A research paper, published in August 2021 in the Journal of Public Economics, identifies the criteria for choosing appliances used by U.S. households. It combines variations in local energy prices and observations of consumer behavior regarding their choice of a type of household appliance that is more or less energy efficient.

Interview with Sébastien Houde, Associate Professor in the Management and Technology Department of Grenoble Ecole de Management. He is a Doctor of Economics from Stanford University in the United States and specializes in energy and environmental economics, industrial organization, and behavioral economics. In particular, he studies energy policies aimed at optimizing energy consumption in light of the energy transition.

What is the context of your joint study with Erica Myers?

Our study was conducted in the United States, where energy prices vary by region, from 2008 to 2012. This study's objective was to understand how to standardize household energy consumption.

In fact, since the 1970s, there has been a recurring debate about managing consumer energy demand. The controversy is based on three different options: the use of price mechanisms, such as taxes, which many believe have little influence on energy consumption; the promotion of education and information; and the use of standards to regulate energy consumption.

Therefore, the main controversy is an energy tax, which is not a popular measure. Individuals do not respond favorably to it. Moreover, when it specifically comes to household appliances' energy consumption, the prices are unclear - much more so than gas prices, for example.

For this reason, our goal was to study individuals' behavioral responses to changes in energy prices when purchasing household appliances. In fact, it is widely believed that changing electricity prices will have little effect on household behavior, especially for household appliances.

What does this targeted study reveal about U.S. consumers' buying behavior when it comes to appliances?

Our research study focused specifically on the purchase of refrigerators. It turns out that popular belief is not accurate: generally speaking, people take into account this equipment's power consumption and the energy price at the time of purchase.

In particular, our study shows that although information on refrigerators' energy consumption is complex, when households choose to purchase this equipment, they prefer more energy-efficient appliances in places where the energy price is high.

The conclusion is that, on average, consumers are very fair and rational in their buying behavior. They are well-informed and their behavior is in line with a basic economic intuition: if you increase the purchase price of equipment, you gain in energy efficiency.

Given these results, can you establish a link with the carbon tax?

Carbon pricing is unpopular for a number of reasons. First of all, the carbon tax increases energy prices. Secondly, it aims to change behavior. First and foremost, our study supports the argument that taxes are effective in changing behavior. Secondly, the pricing of electricity does not fully reflect market conditions. Indeed, in the United States, energy prices vary from region to region. In France, the electricity price is uniform even if, in reality, there is a large distortion of an electron's value: the place of production of nuclear energy is different from the place of distribution, and the transport of this energy generates a cost.

As a result, it is necessary to focus on mechanisms that simplify energy pricing in order to inform consumers.

In your research, you mention the key influence of "negative externalities" on energy prices. What is this about?

The negative externalities are all the external, negative social costs - pollution via CO2 emissions for example - which are not reflected in the energy market. In France, the energy produced by nuclear power does not emit CO2. However, the other social costs of this energy source are not taken into account. Renewable energies also have social costs. For example, wind turbines, which are located in some parts of France, can cause inconveniences for local communities.

Moreover, with the introduction of mass renewables, we will need more gas-fired power plants to better manage supply, which will lead to an increase in negative externalities - and thus an increase in the social cost of renewable energy.

What are the main findings of your research?

Because of distortions due to negative externalities, energy pricing does not reflect the market price in all countries. In addition, if we raise energy prices to take the cost of carbon into account, we will increase the cost of energy.

In the United States, standardization of energy prices must be carried out with care. It is true that the carbon tax can influence the demand for energy, but be careful, because the price of electricity is already high. Our recommendation is to use the opportunity represented by a carbon tax as a chance to rethink electricity rates on a national scale.

Finally, remember that the production of renewable energies changes the price of electricity, and their effect on negative externalities can be uncertain. Our research shows that pricing has a role to play in correcting these externalities.

Read the study

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