Empirical Evidence Of Consumer Response In Regulated Markets

The U.K. Competition and Markets Authority has opened two major investigations into the retail energy and banking sectors, and identifies weak consumer response as a potential theory of harm in both sectors. Consumers of many regulated services, including energy and banking, need to make active moves to switch suppliers, with profound consequences for how well the market functions. We identify differences in expected gains across demographic groups, particularly with respect to age and income, the associated changes in activity and implications for policy. We find that potential gains and anticipated switching time are associated with changes in consumer activity, but with differences between markets, demographic groups and individuals. Rather than concentrate on the average consumer response, we find variations across demographic groups, and that well informed vulnerable consumers are not necessarily less responsive than others, once we control for their expectations. We conclude that sector regulators and agencies who wish to encourage consumer action need to differentiate their policies: strategies to emphasize potential gains and reduce anticipated switching time are the most likely to increase consumer activity, but programs need to be tailored to particular markets and target groups if they are to be effective in stimulating consumer activity.