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The Incidence of Tariff Schedules and Price Information on Inattentive Consumers: a Lab Experiment

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Abstract

We design an induced value laboratory consumption choice experiment where complex tariff schemes trigger nonlinear simplification heuristics that lead individuals to over- or underconsume public goods such as electricity, gas, or drinking water. By studying this “schmeduling” bias, we investigate how an informational nudge could reduce it. Participants choose consumption levels repeatedly under different tariff schemes, where the marginal price per unit either remains constant (constant block rate, i.e., CBR) or increases above a certain threshold (increasing block rate, or IBR). We observe that the vast majority of choices are optimal, but a significant number of them reveal overconsumption. To investigate the impact of the informational nudge on these errors, some of our participants received a marginal price reminder. In that case, the learning effect helps to achieve convergence towards the optimal consumption value. To explain these effects, we use econometric models relying on microeconomic behavioral inattention to price to capture the magnitude of consumers’ inattention, observing, in particular, how the informational nudge is decreasing it.

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Availability of Data and Material/Data Availability

The data will be provided upon request by authors in a csv file when the final publication into the journal is ensured.

Notes

  1. As noticed by Gabaix [16], “If people don’t pay attention, perhaps a reminder will help. In terms of modeling, such a reminder could be a “free signal.” This is precisely the way we pave, since some of our participants get a price reminder when choosing consumption level in order to draw their attention to the price and help them to make better consumption choices (i.e., choices that improve their own welfare).

  2. Additional details about the composition of our experimental sample are given in the Appendix 2.

  3. In that, our experimental results are consistent with the ones obtained by Rees-Jones and Taubinsky [4], who find strong evidence for ironing in the case of the US Federal Income Tax schedule by using a field experiment.

  4. The variable switch corresponds to the number of safe lotteries chosen against a risky lottery in the Holt-Laury procedure for eliciting the risk-aversion level for a given participant. A switch that equals 4 implies risk neutrality. For more details, see Holt and Laury [35].

  5. This is consistent with the framework used by, among others, Alcott and Kessler [9] or Brent and Ward [8] that distinguish an internality parameter (a factor that affects choice but not experienced utility, e.g., mistake in evaluation due to inattention) from the moral cost of choice (coming for instance from consumption comparison to peers).

  6. Gabaix [16], p. 268.

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Acknowledgements

We thank Elven Priour for programming the script and organizing the experimental sessions. We also thank participants to various conferences and seminars for helpful comments. We are also grateful to reviewers for helping us to significantly improve our paper.

Funding

We acknowledge the financial support of the University of Rennes 1 and of WATER JPI, NEWTS Project. Gratifications of experimental participants are paid thanks to the financial support by ANR NEWTS (Nudges for Economics of Water TariffS, Water JPI Joint Call, ANR-18-WTW7-000,207).

Author information

Authors and Affiliations

  1. Univ. Grenoble-Alpes, Grenoble School of Political Studies, GAEL, INRAE, CNRS, Grenoble, France

    Marie-Estelle Binet

  2. Univ Rennes, CNRS, CREM - UMR 6211, F-35000, Rennes, France

    Laurent Denant-Boemont & Sabrina Hammiche

Authors
  1. Marie-Estelle Binet
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  2. Laurent Denant-Boemont
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  3. Sabrina Hammiche
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Contributions

All of the three authors contribute fully and equally to the final paper.

Corresponding author

Correspondence to Marie-Estelle Binet.

Ethics declarations

Ethics Approval

Not applicable (no ethics committee exist at University of Rennes 1).

Consent to Participate

Each invited participant individually signed his/her consent form to be able to participate at the beginning of the experimental session. If he/she disagrees with the consent form, or is reluctant to finally participate, he/she is free to leave the experimental lab.

Consent for Publication

We follow fully the European Regulation Act RGPD (General Regulation for Private Data Protection) implemented in France since the 05/25/2018: Data are fully anonymized, safely kept under robust data privacy and security protocols, and are only used for scientific purposes. All of this information is provided to each participant at the beginning of experimental sessions.

Conflict of Interest

The authors declare no competing interests.

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Appendices

Appendix 1

Instructions for IBR scheme with no information reminder + IBR with information reminder (translated from French)

Welcome,

Thanks for participating to this experimental session. If you make your choices carefully, you will be able to obtain a considerable amount of money, with the amount depending on your choices.

More precisely, during this experiment, you will have to make 40 choices during 40 periods, with 2 steps, each step being made of 20 periods. During each of these period choices, you will be able to obtain a certain amount of points. At the end of the session, the computer will randomly choose for each participant 2 period choices made during the first step and 2 period choice made during the second step. The computer will add all the points the participant gained during these 4 periods randomly chosen and will convert the total number of points in euros according to the following rate: 1 euro per 20 points.

Main Principle of the Experiment

During each period, you will have to choose a certain amount of goods to purchase given a personal endowment (in points, displayed on your computer screen in your personal choice computer interface) that you have and for a given unit price for this good. It is not possible to have expenditures that are higher than your personal endowment. The unit price of the good to purchase will be given in the following instructions for each step, and this price may change between the first and the second step. The more units you will buy, the more points you will gain. However, you will have to deduct from this gain the amount you should pay for these units + a certain amount of administrative charges.

Your net gain will be computed in the following way by the computer:

Your net payoff = Gross Payoff – Administrative Charges – Total price for goods

The total price for the goods purchased will simply be the number of units you bought multiplied by the unit price. For instance, if the unit price equals 1 and if you choose to buy 7 units, the computer will deduct 7 points (1*7) for the total price + a certain amount of administrative charges for buying 7 unit.

When you make your choice, the computer screen will display some information that will help you to compute your possible payoffs, namely, gains in points depending on the number of units you purchase and administrative charges.

The First Step

This step will last 20 periods. During this first step, the unit price for the good will be 1 point per unit if you purchase strictly less than 6 units and 3 points per unit if you purchase 6 units or more (up to 20). Depending on the number of units you purchase, the gross gains and the administrative charges will stay the same for each period (Fig. 7).

The computer interface for making your choice during the first step will be as follows:

Fig. 7
figure 7

Screen capture of Z-Tree + no price information recall (translated from French)

Full size image

(Attention please! The figures that you see in this screen capture are not necessarily the same as the ones that will be displayed when you will actually have to choose.)

Here, choosing to purchase will consist of moving the cursor to a given number of units you want to purchase, from 0 to a maximum of 20 units. In the screen capture, this fictitious participant receives an endowment of 200 points. If he chooses to buy 10 units, as this number is higher than 6, the unit price equals 3. The purchasing price would be therefore 10*3 = 30 points. As a consequence, this participant would receive 269 points as her gross payoff and would be charged 170 points for administrative charges. Finally, her net payoff for purchasing 10 units would be computed as follows:

Net payoff = 269 −170 −30 = 69 points.

As a consequence, her net payoff in the first step would be the following:

$$\begin{aligned}Net\; payoff=&Gross \;Grain-Administrative \;Charges\\&-(1\; point \times number \;of\; purchased\; units\; \\&\mathrm{\;IF\; the\; number\; of\; purchased\; units\; is\; }\\&\mathrm{strictly\; less\; than\; 6})\end{aligned}$$

OR

$$\begin{aligned}Net\;payoff=&Gross\;Gain\;Administrative\;Charges\\&-(3\mathrm{points}\times number\;of\;purchased\;units\;\\&\mathrm{IF}\;\mathrm{the}\;\mathrm{number}\;\mathrm{of}\;\mathrm{purchased}\;\mathrm{units}\;\mathrm{is}\;\\&\mathrm{equal}\;\mathrm{too}\;\mathrm{more}\;\mathrm{than}\;6)\end{aligned}$$

At the end of each period, the computer will display a screen that will recall your personal endowment, the number of units you chose to purchase, the amount of administrative charges for your purchase, the total purchasing price, your gross payoff, and finally your net payoff.

These period choices will be repeated 20 times during this first step.

Second Step

For this step, the unit price for the good will be 1 point per unit strictly less than 6 units and 3 points per unit if you purchase 6 units or more (up to 20). Depending on the number of units you may purchase, you will obtain, similar to the first step, gross payoffs and you will be charged administrative charges. Gross gains and administrative charges during this second period will be the same as in the first period (Fig. 8).

The computer interface for making your choice during the second step will be as follows:

Fig. 8
figure 8

Screen capture of Z-Tree + price information recall (translated from French)

Full size image

(Attention please! The figures that you see in this screen capture are not necessarily the same as the ones that will be displayed when you will actually have to choose.)

Here, choosing to purchase will consist of moving the cursor to a given number of units you want to purchase, from 0 to a maximum of 20 units. Differently from the first step, the unit price will be displayed on the screen below the cursor (here, as the number of units selected is 17, the unit price is recalled to be 3 points per unit).

In the screen capture, this fictitious participant receives an endowment of 200 points. If she chooses to buy 10 units, as this number is strictly higher than 5, the unit price equals 3. The purchasing price would therefore be 10*3 = 30 points. As a consequence, this participant would receive 269 points as her gross payoff and would be charged 170 points in administrative charges. Finally, her net payoff for purchasing 10 units would be computed as follows:

Net payoff = 269 −170 −30 = 69 points.

As a consequence, her net payoff in the first step would be the following:

Net payoff = Gross Gain – Administrative Charges – (1 point × number of purchased units IF the number of purchased units is strictly less than 6).

OR

Net payoff = Gross Gain – Administrative Charges – (3 points × number of purchased units IF the number of purchased units is equal to or more than 6).

At the end of each period, the computer will display a screen that will recall your personal endowment, the number of units you chose to purchase, the amount of administrative charges for your purchase, the total purchasing price, your gross payoff, and finally your net payoff.

These period choices will be repeated 20 times during this second step (Tables 11 and 12).

Your Final Payoff

When each participant completed the 40 period choices, the computer would randomly draw 4 periods for each participant as described earlier, and would display your total payoff both in points and in Euros.

Good luck!

6.1 Appendix 2. Some Characteristics About the Experimental Sample (n = 120)

Table 11 Level of study
Full size table

A majority of the 120 participants (54.17%) were first year students at the university. The others are in their second year (31.67%), third year (10.83%), or fourth year (2.50%).

Table 12 Fields of study (major)
Full size table

53.3% of the students in the experiment are studying economics, 20% are enrolled in law or humanities, 5% in management, 1.7% in science, and 20% in other types of studies.

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Binet, ME., Denant-Boemont, L. & Hammiche, S. The Incidence of Tariff Schedules and Price Information on Inattentive Consumers: a Lab Experiment. Environ Model Assess 27, 729–746 (2022). https://doi.org/10.1007/s10666-022-09845-2

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