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We consider the setting in which an electric power utility seeks to curtail its peak electricity demand by offering a fixed group of customers a uniform price for reductions in consumption relative to their predetermined baselines. The underlying demand curve, which describes the aggregate reduction in consumption in response to the offered price, is assumed to be affine and subject to unobservable random shocks. Assuming that both the parameters of the demand curve and the distribution of the random shocks are initially unknown to the utility, we investigate the extent to which the utility might dynamically adjust its offered prices to maximize its cumulative risk-sensitive payoff over a finite number of T days. In order to do so effectively, the utility must design its pricing policy to balance the tradeoff between the need to learn the unknown demand model (exploration) and maximize its payoff (exploitation) over time. In this paper, we propose such a pricing policy, which is shown to exhibit an expected payoff loss over T days that is at most O( p T), relative to an oracle pricing policy that knows the underlying demand model. Moreover, the proposed pricing policy is shown to yield a sequence of prices that converge to the oracle optimal prices in the mean square sense.
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New Pricing Models, Same Old Phillips Curves?
Abstract We show that in a broad class of menu cost models, the first-order dynamics of aggregate inflation in response to arbitrary shocks to aggregate costs are nearly the same as in Calvo models with suitably chosen Calvo adjustment frequencies. We first prove that the canonical menu cost model is first-order equivalent to a mixture of two time-dependent models, which reflect the extensive and intensive margins of price adjustment. We then show numerically that in any plausible parameterization, this mixture is well approximated by a single Calvo model. This close numerical fit carries over to other standard specifications of menu cost models. Thus, for shocks that are not too large, the Phillips curve for a menu cost model looks like the New Keynesian Phillips curve, but with a higher slope.
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- PAR ID:
- 10484844
- Publisher / Repository:
- Oxford University Press
- Date Published:
- Journal Name:
- The Quarterly Journal of Economics
- Volume:
- 139
- Issue:
- 1
- ISSN:
- 0033-5533
- Format(s):
- Medium: X Size: p. 121-186
- Size(s):
- p. 121-186
- Sponsoring Org:
- National Science Foundation
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