Tourist levies and tourist spending

The New Zealand Herald reported earlier this month:

An international tourism levy charged to visitors to New Zealand will increase to $100 – a jump of almost 200% – in a decision the Government believes will help boost economic growth and support conservation.

But it has some in the sector concerned the increase will be a barrier to visitors coming to New Zealand.

The International Visitor Conservation and Tourism Levy (IVL) is currently set at $35 and is charged to most tourists, people on working holidays, some students and some workers coming to New Zealand.

The IVL acts as a form of two-part pricing (which you can read about here). A firm uses two-part pricing when it splits the price into two parts: (1) an up-front fee for the right to purchase; and (2) a price per unit. If the consumer wants to buy any of the product, they must first pay the up-front fee. In the case of the IVL, it isn't a firm that's using two-part pricing, it is New Zealand as a whole. Tourists to New Zealand, if they want to buy any tourism experiences in New Zealand, must first pay the IVL.

The effect of the IVL on tourist spending is shown in the consumer choice model diagram below. In this case, the consumer is a tourist. They can spend their income (M) on either of two goods: NZ goods (as a tourist) with price Px, or overseas goods with price Py. The tourist's budget constraint with no IVL is the black line. The highest indifference curve that they can reach is I0, and they will buy the bundle of goods E0, which includes X0 NZ goods, and Y0 overseas goods. Now consider the impact of the IVL. The IVL takes income away from the tourist, but they don't receive any NZ goods in exchange for it (they just receive the right to buy NZ goods, as they can enter the country). That shifts the tourist's budget constraint inwards to the blue line (note that the end points on the budget constraint now have income (M-F), where F is the amount of the IVL). The tourist cannot buy the bundle of goods E0 anymore, as it is outside their budget constraint (it is outside the feasible set). The highest indifference curve that they can reach is now I1, and they will buy the bundle of goods E1, which includes X1 NZ goods, and Y1 overseas goods.

Now consider what this means for the government and for tourism operators in New Zealand. Overall, the tourist is spending more money in New Zealand now. We know this because they are buying fewer overseas goods (Y1 instead of Y0), and since they are still spending all of their income, they must be spending less on overseas goods (because the price of overseas goods is still Py), and more in New Zealand (made up of the IVL and what the tourist spends on NZ goods). The government might see that as a good thing.

On the other hand, the tourist is now buying fewer NZ goods (X1 instead of X0). That clearly isn't a good thing for New Zealand tourism operators, because tourists are spending less on NZ goods. It is little wonder that tourism operators are not happy about the IVL increasing. [*]

It gets worse for NZ tourism operators though, when we consider heterogeneous tourists. The diagram below shows two different consumers - a high-demand tourist (who spends a lot on NZ goods) shown in blue, and a low-demand tourist (who spends very little on NZ goods) shown in red. After the IVL is introduced, the high-demand tourist moves from buying bundle EH0 to bundle EH1. This means that they buy fewer NZ goods (XH1 instead of XH0), but spend more in NZ in total (just like the previous diagram, because they are buying less overseas goods - YH1 instead of YH0). However, the low-demand tourist's best affordable choice after the IVL is introduced is to stop buying any NZ goods at all, and not pay the IVL at all. They would consume the bundle EL1, spending all of their income on overseas goods (and buying no NZ goods at all instead of XL0).

Tourism operators might console themselves that while there will be fewer tourists, the remaining tourists are those that buy a lot of NZ goods. However, high-demand tourists could even end up spending less in NZ overall, as shown in the diagram below. In this diagram, I only show the high-demand tourists (for simplicity). Notice that in this case, once the IVL is introduced the high-demand consumers move from buying bundle EH0 to buying bundle EH1, and they end up buying less NZ goods (XH1 instead of XH0), but more overseas goods (YH1 instead of YH1). Since they are buying more overseas goods, they must be spending more on overseas goods (because the price of overseas goods is still Py), and therefore spending less in NZ overall (even when you add the IVL plus their spending on NZ goods).

Which of these scenarios will play out? Will consumers end up spending more overall (combining the IVL and spending on NZ goods)? Low-demand tourists will stop visiting, but how many will do so? Will high-demand tourists spend more overall, or less? These are all relevant questions that it would be worthwhile to answer. And the New Zealand tourism industry really needs some answers, because it will be really consequential for their revenue and profits.

*****

[*] Note that the diagram doesn't show the effect of increasing the IVL. However, comparing IVL with no-IVL is qualitatively the same as comparing smaller-IVL with larger-IVL.

Leasing vehicle batteries as two-part pricing with customer lock-in

The Dangerous Economist (Cyril Morong) had a post earlier this month about pricing strategy, linking to this Wall Street Journal article (paywalled), which says:

The EV company, established in 2017 in Vietnam, plans to sell two all-electric sport-utility vehicles in the U.S. to start: a midsize SUV, called the VF 8, that starts at $40,700, and a larger VF 9, starting at $55,500. U.S. buyers can place orders now with deliveries expected to start at the end of 2022.

Unlike other EV rivals in the U.S., VinFast has a unique business model in which buyers pay one price for the vehicle, but then lease the battery for a monthly fee. The company offers two battery-subscription plans, costing anywhere from $35 to $160 a month, depending on how much the owner wants to drive, the model purchased and the type of battery.

The fee includes maintenance of the battery and replacement when charging capacity drops below 70% of its original capacity.

In his post, Cyril notes that:

This sounds like insurance companies charging you a lower premium if you accept a high deductible (that is the amount of, say, medical costs you have to pay before the insurance pays anything).

What the VinFast example brought to mind for me was two-part pricing, as I discussed in this post on Thursday. A firm uses two-part pricing when it splits the price into two parts: (1) an up-front fee for the right to purchase; and (2) a price per unit.

The two-part pricing strategy adopted by VinFast is unusual compared to the theoretical two-part pricing strategy (as shown here and here) for two reasons. First, with two-part pricing the up-front fee usually only gives the consumer the opportunity to purchase the product and nothing else. However, in VinFast's case the first part of the two-part price gives them the vehicle, but not the battery (the second part of the price is the per-month subscription fee for the battery).

Second, it usually makes sense for the seller to increase the first part of the two-part price, and lower the second part. This has the effect of creating value (through a lower price per-unit) for the consumer, and then capturing that value back as higher profits (through charging the consumer for the opportunity to purchase in the first place).

However, there is another element of this pricing strategy that explains how its unusual features make sense. Without a battery, the cars might be useful as a storage shed (I guess?), but in order to be used as a vehicle they need a battery. So, VinFast's customers are essentially locked into subscribing to VinFast to make their vehicle operable. If VinFast is smart, they will be using custom batteries that are not compatible with those provided by any other supplier, so that they can be assured that their customers are locked in.

As I discussed with my ECONS101 class this week, locking in customers can be very profitable for firms. VinFast sells the vehicle at a cheaper price (by US$15,000 to US$20,000, according to the Wall Street Journal article), and this lures the customers in and locks them into paying a high monthly subscription fee for the battery. And VinFast laughs all the way to the bank.

Costco and two-part pricing

This week in my ECONS101 class, we covered pricing strategy. One pricing strategy that many firms use is two-part pricing. A firm uses two-part pricing when it splits the price into two parts (there is no mystery in why it is called two-part pricing!): (1) an up-front fee for the right to purchase; and (2) a price per unit. If the consumer wants to buy any of the product, they must first pay the up-front fee. We can think about two-part pricing first by contrasting it with a profit-maximising firm with market power that is pricing at a single price-per-unit, as in the diagram below (for simplicity, I'll use a constant-cost firm).

The firm with market power selling at a single price-per-unit selects the price that maximises profits. This occurs where marginal revenue is equal to marginal cost, i.e. at the quantity QM. To sell that quantity, they set the price at PM. The producer surplus (profit) the firm earns is the rectangular area CBDF.

However, if the firm switches to two-part pricing, then they can charge an up-front fee for consumers to access the market. The maximum that consumers are willing to pay to access the market will be equal to their consumer surplus (the difference between what the consumer is willing to pay, and the price that they actually pay). The consumer surplus is the consumer's economic rent - it is the surplus they receive from having the opportunity to buy the good or service. So, the maximum that the firm could charge as an up-front fee is the amount of consumer surplus. With the price set at P0, this is the area ABC, in which case profits (combining the original producer surplus plus the up-front fee) would now be the combined area ABDF.

The firm can do even better than that. Profitability is all about creating and capturing value. So, if the firm can create more value (by increasing the consumer surplus), they can capture more profit (by increasing the size of the up-front fee). So, by lowering the price to PS, the consumers would be willing to buy the quantity QS, and would receive consumer surplus equal to the area AEF. By setting the up-front fee equal to AEF and the per-unit price at PS, the firm then increases their profit to be all of the area AEF.

That brings me to my example, Costco, which will shortly open in New Zealand. As this article in The Conversation last week by Megan Phillips (AUT) notes:

Multiple delays and a NZ$60 entry cost have done little to quench enthusiasm for New Zealand’s first Costco, with New Zealanders lining up for more than 90 minutes recently for a chance to buy a membership to the store.

A members-only warehouse retailer, the store will sell a wide range of products including food and grocery items, clothing, electronics, furniture and more. Commentators and people familiar with the brand have claimed the store will disrupt the duopoly that currently dominates New Zealand’s grocery sector.

But to enter the warehouse you must pay a membership fee, set at $60 a year or $55 if you own a business.

Clearly, Costco is employing a two-part pricing strategy here. Notice that the $60 membership fee doesn't entitle customers to anything other than the right to purchase other goods from Costco. The membership fee is the first part of the two-part price, with the second part being the price-per-unit that customers pay when they buy goods in the store.

Now, Costco is deviating a little bit from how we described two-part pricing above, and that is Costco's attempt to overcome one of the problems with two-part pricing. The problem is that two-part pricing only works when the firm has homogeneous demand for their product (to see why, read this earlier post which explains the problem in detail). This means that all consumers have roughly the same demand for the product. This is unlikely to be the case for Costco, because they sell an enormous range of products, and their consumers likely have very different preferences from each other. When demand is heterogeneous (consumers have very different demands or preferences), then two-part pricing tends to encourage low-demand consumers to stop buying (because they don't want to pay the membership fee when they don't buy very much at all), while high-demand consumers buy more but end up spending less in total (because of the lower second part of the price, as per our earlier diagram).

However, Costco has found a way for two-part pricing to work even with heterogeneous demand. Notice that the membership fee is only $60 per year. Consumers will baulk at the membership fee only if their consumer surplus is likely to be less than $60 per year. This is unlikely to be the case for many. This is quite different from the diagram we drew earlier, where the firm increases profits by driving up the size of the up-front fee as much as possible.

So, why have a membership fee at all, if it is set so low? There are a number of reasons why Costco might implement the membership fee. First, it gives Costco customers a feeling of exclusivity. It makes them feel like they are part of a special club. As Phillips notes in that article in The Conversation:

That said, Costco has a massive following. One fanatic even tattooed the Costco’s private label brand (Kirkland Signature) on himself, and other loyal shoppers have proposed or even tied the knot in the warehouse.

The adoration seems to be building in New Zealand with 70,000 followers on a local fan page.

A loyal customer base is quite valuable and profitable for firms. Loyal customers have more inelastic demand for products, allowing prices to be slightly higher. However, Costco maintains its low prices in spite of the opportunity, because its reputation as a low cost store is important for maintaining customer loyalty.

Second, because it requires a membership to buy products from Costco, Costco knows who all of its customers are. It knows what they bought, and when, and how much they were willing to pay (or, more accurately, it knows they were probably willing to pay a bit more than they actually did pay). And Costco knows what their customers didn't buy as well, especially for products prominently on sale.

All of this customer purchase (and non-purchase) data is valuable for developing future pricing strategy. It's the main reason why supermarkets have loyalty cards (it's not out of the goodness of their hearts). And retailers have barely scratched the surface in terms of what is possible with their customer data. As I discussed in my ECONS101 class today, it may not be too long before retailers remove price stickers from their products and from the shelves, and ask customers to scan a QR code or use an in-store app to find the price. When that happens, you will know that the retailer has adopted personalised pricing (first-degree price discrimination). Costco isn't there yet either, but give it time.

Registering guns vs. registering gun owners

Unsurprisingly, gun control is in the news, with the government having announced an impending ban on military-style semi-automatic (MSSA) weapons. That ban is long overdue, with the 1997 Thorp report noting that:

...the potential consequences of MSSA misuse clearly outweigh any benefit to society in permitting their ownership.

Any doubt as to how to measure the costs of allowing MSSA ownership was cruelly put to rest on Friday 15 March. Those costs clearly outweigh the benefits of farmers being able to rapidly exterminate rabbits without having to spend time re-loading their weapon.

However, this isn't a post about MSSAs. It is about another aspect of gun control - registration. New Zealand has a system where gun owners are registered, but individual firearms are not. In the U.S., individual firearms are registered, but for the most part gun owners are not (there are some differences in regulations between different states). What impact does the difference in registration systems make to the number of people with at least one gun, and the number of guns per gun owner?

Consider a system of gun registration. Every gun is registered. The cost of gun registration is included in the price of each gun that is sold (possibly the cost of registration is an explicit part of the price, or perhaps the costs of the registration system are borne by manufacturers or sellers, in which case they charge a higher price to compensate). [*]

We can think of this registration system as the base case, illustrated in the diagram below with the black lines. In this model, the gun consumer is choosing between buying guns (X, measured on the x-axis) or all other goods (AOG, measured on the y-axis). The straight black line is their budget constraint, which represents the most the consumer can afford to buy with their income, when there is a single price-per-unit for guns (including the cost of registration). The consumer purchases the bundle of goods E, which is on the highest indifference curve they can get to (I0). This bundle includes X0 guns, and A0 of All Other Goods.

Now consider what happens if guns are not registered, but owners are. This is an example of two-part pricing. Two-part pricing occurs when the price is split into two parts: (1) an up-front fee for the right to purchase; and (2) a price per unit. Here, the up-front fee is the cost of registering for a firearms licence. The price per unit is the cost of the gun. However, the cost of the gun is lower than it would be when guns are registered, because of the saving on the cost of gun registration.

Because of the up-front fee (firearms licence), the budget constraint starts at a lower point on the y-axis, since paying for the firearms licence is like giving up income for the consumer. Then, because there is a lower per-unit price, the budget constraint for licensing gun owners (the red budget constraint) is flatter than for licensing guns. Let's assume it passes through the point E (so the consumer could still purchase that bundle of goods if they wanted to). There is one other point that we need to recognise - if the consumer buys no guns, then they do not need to pay for a firearms licence. So Bundle C is also an option for the consumer.

When gun owners are licensed instead of guns, this consumer can now reach a higher indifference curve, by buying the bundle of goods D (their new best affordable choice). This bundle includes more guns (X1), and less of All Other Goods (A1). So, we would expect gun owners to own more guns if gun owners are registered, but guns are not.

Is there evidence to support this? Let's compare New Zealand and the U.S. In New Zealand, there are 245,000 firearms licences, and 1.2-1.5 million firearms (see the statistics at the bottom of this article). That accounts to a rate of about 5.5 firearms for each person with a licence. In the U.S., about 25% of adults own at least one firearm (see the statistics in this article), or about 60 million adults, and there are about 300 million firearms, or about five firearms for each gun owner. So, that provides some slight support for the model.

However, notice that the rate of gun ownership among New Zealand adults (245,000 out of roughly 3.5 million adults is roughly 7 percent) is substantially less than in the U.S. (25 percent). What accounts for this?

Consider consumers with low demand for gun ownership, as shown in the diagram below by the blue indifference curves (the red indifference curves show the preferences for high-demand consumers). With gun registration, the low demand consumer buys Bundle G, which includes X1 guns, and A1 of All Other Goods. When guns are registered, even many low-demand consumers prefer to own a gun.

However, if gun owners are registered instead of guns, the low demand consumer can no longer afford bundle G (it is outside the new budget constraint). The highest indifference curve they can get to is I0, where they buy Bundle C. This bundle includes no guns. These low demand consumers find themselves better off by not buying any guns at all, because then they don't have to pay for a firearms licence. [**]

So to summarise, licensing gun owners rather than guns leads many people not to want to own any guns at all. However, those who do own guns would tend to own more of them. And comparing U.S. and New Zealand data on gun ownership and the number of guns per gun owner seems to support this.

At this point, which system you prefer comes down to whether you want lots of people to have guns, or you want fewer people to have guns but each one of those gun owners to own many guns. Of course, registering both guns and gun owners would be preferable to either registration system in isolation, if your goal is simply to reduce the total number of available guns.

*****

[*] Another alternative is that the gun registration system is funded by taxpayers. However, there will still be some additional time and effort required to purchase a gun that is registered, so the cost will be higher than with no registration system.

[**] The story for high-demand consumers is similar to that in the first diagram. Here, they move from consuming bundle J (if guns are registered but owners are not) to bundle K (if guns are not registered but owners are). So, high-demand consumers own more guns in the case where owners are registered but guns are not.

Why two-part pricing doesn't work for heterogeneous demand

A firm uses two-part pricing when it splits the price into two parts (the clue is in the name!): (1) an up-front fee for the right to purchase; and (2) a price per unit. If the consumer wants to buy any of the product, they must first pay the up-front fee. We can think about two-part pricing first by contrasting it with a monopoly firm pricing at a single price-per-unit, as in the diagram below (for simplicity, I'll use a constant-cost firm).

The monopoly firm using a single price-per-unit selects the price that maximises profits. This occurs where marginal revenue is equal to marginal cost, i.e. at the quantity QM with price PM. The producer surplus (profit) the firm earns is the rectangular area CBDF.

However, if the firm switches to two-part pricing, then we first recognise that the firm can charge an up-front fee equal to the consumer surplus, and the consumer would still be willing to purchase the same quantity (Q0). So, the up-front fee could be as large as the area ABC, in which case profits would be the combined area ABDF.

The firm can do even better than that. Profitability is all about creating and capturing value. So, if the firm can create more value (by increasing the consumer surplus), they can capture more profit (by increasing the size of the up-front fee). So, by lowering the price to PS, the consumers would be willing to buy the quantity QS, and would receive consumer surplus equal to the area AEF. By setting the up-front fee equal to AEF and the per-unit price at PS, the firm then increases their profit to be all of the area AEF.

We can also show the effect of two-part pricing using the consumer choice model. This is illustrated in the diagram below. The black budget constraint represents the most the consumer can afford to buy with their income, when there is a single price-per-unit for Good X (with 'All Other Goods' [AOG] on the y-axis). The consumer purchases the bundle of goods E, which includes X0 of Good X, and A0 of All Other Goods.

With two-part pricing, the firm charges an up-front fee (so the budget constraint starts at a lower point on the y-axis, since paying the fee is like giving up income for the consumer), and a lower per-unit price. So the budget constraint for two-part pricing (the red budget constraint) is flatter. Let's assume it passes through the point E (so the consumer could still purchase that bundle of goods if they wanted to. There is one other point that we need to recognise - if the consumer buys none of Good X, then they do not need to pay the fee. So Bundle C is also an option for the consumer.

With two-part pricing, this consumer can now reach a higher indifference curve, by buying the bundle of goods D (their new best affordable choice). This bundle includes more of Good X (X1), and less of All Other Goods (A1). Because they are buying less of All Other Goods, they must be spending more on Good X.

Two-part pricing works well when the firm faces homogeneous demand for its product (i.e. when all consumers have similar demand for the product). We can also use the consumer choice model to demonstrate why two-part pricing doesn't work so well when there is heterogeneous demand.

Consider two consumers - one with low demand (shown on the diagram below with the blue indifference curves), and one with high demand (red indifference curves). With a single price-per-unit, the low demand consumer buys Bundle G, which includes X1 of Good X, and A1 of All Other Goods, and the high demand consumer buys Bundle J, which includes X3 of Good X, and A3 of All Other Goods.

When the firm moves to two-part pricing instead, the low demand consumer can no longer afford bundle G (it is outside the new budget constraint). The highest indifference curve they can get to is I0, where they buy Bundle C. This bundle includes none of Good X. These low demand consumers find themselves better off by not buying any of Good X at all, because then they don't have to pay the up-front fee.

The high demand consumer would be better off moving to buying Bundle K, which is on the highest indifference curve they can now reach. Bundle K contains more of Good X (X4), so two-part pricing does induce these consumer to buy more. However, Bundle K includes more of Good A (A4), which means that even though these high demand consumers are buying more of Good X with two-part pricing, they are actually spending less on Good X.

So, two-part pricing doesn't work so well for heterogeneous demand, because the lowest demand consumers will stop buying the good entirely, while the highest demand consumers will buy more of the good, but spend less on it. The combination of these two effects is likely to reduce the firm's profit.

This is why you don't often see two-part pricing alone 'in the wild'. Most often, firms will price discriminate first (often through menu pricing - offering different options to different consumers, knowing that each option will appeal to a different 'type' of consumer), then within each subgroup use two-part pricing.

Read more:

• Is the marginal cost of electricity falling? Some evidence from recent two-part pricing changes

Is the marginal cost of electricity falling? Some evidence from recent two-part pricing changes

There's some interesting things going on in electricity prices at the moment. On the one hand, we have the Statistics New Zealand showing that costs of electricity generation are rising, and that these costs are being passed onto commercial customers in the form of higher spot prices of electricity (see for example here: "...higher costs to generate electricity because of low hydro-lake levels and more expensive thermal generation...").

On the other hand, back in March my electricity retailer changed their pricing plans. Since these pricing plans are an example of two-part pricing and we have recently covered pricing strategy in ECON100, I thought this was a timely opportunity to blog about this. It also gives us a clue as to what is happening to marginal cost for the retailer.

Two-part pricing occurs when the supplier splits the price into two parts (no surprises there!): (1) an up-front fee that gives the consumer the right to purchase; and (2) a separate price per unit of the good or service. Many goods and services are sold with two-part pricing, including telephone services (monthly fee plus cost per call), some theme parks (cost for entry, plus cost for each ride), golf (club membership, plus green fees), and electricity. The two parts of the electricity price are the Daily Fixed Charge (which is a fixed amount per day connected to the electricity network), and the price per unit of electricity (measured in kWh).

Suppliers use two-part pricing in order to increase profits. This is how it works in theory. In the diagram below, the 'traditional' profit-maximising firm will maximise its profits by selecting the price where marginal revenue is exactly equal to marginal revenue. This occurs at the quantity QM, and the per-unit price PM. At this price-quantity combination, consumers receives a surplus (the difference between what they were willing to pay and what they actually pay) equal to the area ABC. Producer surplus (profit contribution) is equal to the area CBDF.

Using two-part pricing, the firm could instead charge a fixed fee equal to exactly ABC for the consumers to have the right to purchase, and a per-unit price of PM, and the consumers would be still willing to buy QM of the product. In this case, there would no longer be a consumer surplus (because this is offset by the fixed fee), and producer surplus would increase to ABDF.

However, the firm could do even better than this. If they instead reduced the per-unit price to PS and increased the fixed fee to be equal to the area AEF, the consumer would be willing to purchase the quantity QS. There would still be no consumer surplus, but producer surplus would be the entire area AEF. Importantly, the optimal per-unit price is equal to marginal cost.

Now, think about what happens if the marginal costs of production fall. Consumer surplus increases, so the optimal size of the fixed fee increases, while the optimal per-unit price decreases.

Now, back to the change in electricity prices. From the letter I received from Genesis in March:

...Your bill reflects a variety of costs, including generation and transmission costs, metering charges and our own business costs... We have recently reviewed our electricity prices in your area and from 6 April 2014 your electricity prices... will change. The weighting of the two components of your pricing plan has also changed. The daily fixed charge (the fixed cost of supplying energy to your property) and the variable change (the cost of electricity you use) have been aligned to better reflect the cost structure used by your network company...

The pricing changes in the letter refer to a 76.9% increase in the Daily Fixed Charge, and decreases in the per-unit charge of between 7.7% and 15.3% (depending on pricing plan). Assuming that Genesis is pricing effectively, then the increase in fixed fee and reduction in the per-unit charge are consistent with a reducing marginal cost of electricity.

Of course, there are alternative explanations. First, perhaps Genesis weren't pricing in isolation but were engaged in a strategic pricing battle with other firms. There is competition among the different retail electricity suppliers, after all. Where firms set similar per-unit charges, they might compete in terms of the fixed fee, driving the fee downwards (until it barely covers the fixed costs of transmission of electricity, maintenance of lines, etc.). This lowers profits. However, competitive pressures as an explanation seems unlikely. For the fixed fee to rise, that would suggest that price competition between the firms has decreased. I would argue that competition is no less now that it was before (in fact it might be more competitive now due to the likes of PowerSwitch) - so why raise the Daily Fixed Charge now?

Second, perhaps Genesis deliberately under-priced the potential fixed fee (but not due to competitive reasons). One potential problem with two-part pricing is if you have heterogeneous demand and you set the fixed fee too high, low demand customers opt out of purchasing from you. So, maybe Genesis intentionally under-estimated the fixed fee in order not to drive customers away. However, again this seems unlikely. They've suddenly raised the Daily Fixed Charge now - did they hugely misinterpret the potential fixed fee before and now suddenly realised that customers wouldn't leave in droves if they raised the fee?

Third, electricity transmission prices are regulated in New Zealand, and electricity transmission charges are fixed costs that make up part of the Daily Fixed Charge. So maybe the Commerce Commission allowed a substantial increase in transmission charges recently? I can't see anything on the Commerce Commission website to suggest they have made a recent change.

So, perhaps that just leaves lower marginal costs of production as an explanation?

One last point: Why aren't the Greens jumping on this change in pricing plans? Surely Genesis isn't alone in making this change (see the point on competitive pressures above)? This change in pricing strategy may have a negative environmental impact. With lower marginal costs, the per-unit price falls and consumers purchase more. Given that New Zealand's marginal electricity production is thermal generation (as I understand it hydro, geothermal, wind, etc. are "always on", so if additional peak load generation is needed it is coal/gas generation), so if retail electricity consumers are purchasing more electricity doesn't that mean more carbon emissions? Having said that, residential consumers make up only about a third of electricity demand in New Zealand (see here - a really useful primer on the electricity sector in New Zealand), so maybe it's not a big deal?