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Centre for international environmental studies
27 January 2017

New article in European Economic Review

New research by Francois Cohen, post-doctoral researcher at CIES, brings new insight on the "energy-efficiency gap", i.e. the assertion that consumers would under-invest in energy-efficient durable goods. In the article "Consumer Myopia, Imperfect Competition and the Energy Efficiency Gap: Evidence from the UK Refrigerator Market", to appear in the European Economic Review, Francois Cohen and his co-authors Matthieu Glachant and Magnus Soderberg develop a novel comprehensive analysis of both demand-side and supply-side inefficiencies that impact the energy-efficiency gap.

The paper innovates by considering consumer myopia on the demand side as well as market power on the supply side. This is important as the market for household appliances tends to be highly concentrated. In the US for instance, the top 4 firms - Whirlpool Corporations, AB Electrolux, GE Company and LG Electronics - represented in 2011 about 90% of the market share for household appliances.

Using data on the UK refrigerator market (2002-2007), the authors find that the average energy consumption of sold appliances is only 7.2% lower than the level that would be observed in a perfectly competitive market with non-myopic consumers. On the demand side, the empirical analysis finds that consumers tend to undervalue future energy costs leading to an increase of average energy use of sold appliances relative to a scenario with non-myopic consumers by about 9.2%. On the supply side, market power yields an opposite impact as it tends to reduce energy use by about 4.2% on average. Indeed, as products which consume more energy also tend to have higher market shares on average, when competition is weak suppliers have thus more latitude to raise their price, which reduces demand. Hence, market power actually reduces energy use. As both imperfections exert opposite effects, they jointly lead to a modest 7.2% increase of energy use compared to a perfectly competitive market with fully rational consumers. The authors also perform a welfare analysis and find that consumer myopia and imperfect competition have limited impact on social welfare (excluding environmental externalities, but including consumer surplus and profits). Consumer surplus would increase by around £76 per sale in the first best optimum – just under 26% of the price of appliances – but most of this increase is a transfer from suppliers, as the overall increase in social welfare is only £18.10.With the exception of energy labeling, which seems to have been sufficient to mitigate imperfections in the UK refrigerator market, policies should primarily be concerned with the traditional environmental externality problem.

Read the publication: http://www.sciencedirect.com/science/article/pii/S0014292117300107

New research by Francois Cohen, post-doctoral researcher at CIES, brings new insight on the "energy-efficiency gap", i.e. the assertion that consumers would under-invest in energy-efficient durable goods. In the article "Consumer Myopia, Imperfect Competition and the Energy Efficiency Gap: Evidence from the UK Refrigerator Market", to appear in the European Economic Review, Francois Cohen and his co-authors Matthieu Glachant and Magnus Soderberg develop a novel comprehensive analysis of both demand-side and supply-side inefficiencies that impact the energy-efficiency gap.

The paper innovates by considering consumer myopia on the demand side as well as market power on the supply side. This is important as the market for household appliances tends to be highly concentrated. In the US for instance, the top 4 firms - Whirlpool Corporations, AB Electrolux, GE Company and LG Electronics - represented in 2011 about 90% of the market share for household appliances.

Using data on the UK refrigerator market (2002-2007), the authors find that the average energy consumption of sold appliances is only 7.2% lower than the level that would be observed in a perfectly competitive market with non-myopic consumers. On the demand side, the empirical analysis finds that consumers tend to undervalue future energy costs leading to an increase of average energy use of sold appliances relative to a scenario with non-myopic consumers by about 9.2%. On the supply side, market power yields an opposite impact as it tends to reduce energy use by about 4.2% on average. Indeed, as products which consume more energy also tend to have higher market shares on average, when competition is weak suppliers have thus more latitude to raise their price, which reduces demand. Hence, market power actually reduces energy use. As both imperfections exert opposite effects, they jointly lead to a modest 7.2% increase of energy use compared to a perfectly competitive market with fully rational consumers. The authors also perform a welfare analysis and find that consumer myopia and imperfect competition have limited impact on social welfare (excluding environmental externalities, but including consumer surplus and profits). Consumer surplus would increase by around £76 per sale in the first best optimum – just under 26% of the price of appliances – but most of this increase is a transfer from suppliers, as the overall increase in social welfare is only £18.10.With the exception of energy labeling, which seems to have been sufficient to mitigate imperfections in the UK refrigerator market, policies should primarily be concerned with the traditional environmental externality problem.

Read the publication: http://www.sciencedirect.com/science/article/pii/S0014292117300107