Welfare Effects of Home Automation Technology with Dynamic Pricing∗

A fixed cost investment in home automation technology can eliminate consumers’ marginal costs of responding to changing demand conditions. We estimate the welfare effects of a home automation technology using a field experiment run by a large electric utility that randomly assigned both a technology and price treatment. Average treatment effects reveal that the home automation technology reduces demand more than twice as much as an alternative technology that only informs consumers of price changes. Furthermore, the average demand reductions during critical price events provide sufficient supply-side welfare gains to fully offset the installation costs of the device. Finally, we estimate household-specific treatment effects by matching households on their pre-treatment policy functions. This demonstrates the additional surplus gained by the utility if it targeted these treatments to households with the largest estimated demand responses. ∗Email addresses are [email protected] and [email protected]. The authors would like to thank Severin Borenstein, Mar Reguant, seminar participants at the Energy Institute at Haas and conference participants at the 2012 Marketing Science Conference, the 2014 Field Experimentation Conference at Rady School of Business, the 2014 Workshop on Economics of of Advertising and Marketing, 2014 IOFest, and the 2015 Winter Marketing-Economics Summit. Rachana Gogate provided valuable research assistance on this project.