24 November 2007
Further flattening it out
Last week, I described OG&E's Guaranteed Flat Bill, and decided it wasn't for me.
Apparently these things are catching on all over the place, because someone took one to economist Tyler Cowen at Marginal Revolution, and he wasn't impressed either:
If you draw a standard and supply diagram, you can see that fluctuating prices (with a constant mean) increase expected consumer surplus but decrease expected producer surplus. For instance as a buyer you'd rather have a price of 50 half of the time and a price of 200 the other half of the time, rather than 125 all the time; the opposite is true for the seller. That is one reason why the utility may prefer a lock-in.
There is also a "only the stupidest consumers will respond" effect. It costs the utility very little to make an offer favorable to themselves but unfavorable to the consumers. It's worth doing even if only a few people accept. Given that utilities are regulated monopolies, you should expect conflict of interest to be high and thus decline most of their offers.
I sent the offer to the shredder yesterday, which should qualify as a decline.
I don't know if OG&E is hoping we're dumb. The first year Oklahoma Natural Gas offered a flat gas rate, I turned it down and paid semi-dearly for so doing, which suggests that perhaps ONG had some motivation other than soaking the customers. But Cowen's general advice makes sense:
The most general response is simply that you should insure only against catastrophic events, and yes that sometimes includes your wife getting mad because you didn't buy a product warranty on your latest purchase of toothpicks.
What, have they started selling toothpicks at Best Buy?Posted at 10:30 AM to Family Joules