Neoclassical Model of Consumer Demand with Identically Priced Commodities; And An Application to Time of Use Electricity Pricing

Hick's (1936) theorem allows aggregation of commodities when their relative prices are fixed, but contrary to a widely expressed view, it does not require that they be aggregated. Even in cases in which commodities have identical prices, all of their income elasticities and many of their price elasticities can be identified through econometric estimation. Using data from the Wisconsin Residential Electricity Pricing Experiment, it is demonstrated how a judiciously chosen level of aggregation can shed light on questions of interest without making the analysis unmanageable. Ninety-six electricity commodities can be distinguished by time of use. Partial Hicksian aggregation is performed. The generalized Leontief indirect utility function is used to estimate consumer preferences for 6 electricity commodities although there are only 2 unique prices. It is found that there are significant substitution possibilities between the Hicksian aggregates of peak and offpeak electricity consumption.