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Alert the Inert? Switching Costs and Limited Awareness in Retail Electricity Markets

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  • Luisa Dressler
  • Stefan Weiergraeber

Abstract

We quantify how switching costs and limited awareness affect consumer inertia in liberalized retail electricity markets by developing and estimating a structural demand model using a novel dataset on electricity contract choices in Belgium. Our data allow us to disentangle different sources of inertia by using a rich combination of macromoments and micromoments. We find that consumers perceive contracts as differentiated and both limited awareness and switching costs hinder efficient choices. Our counterfactuals reveal substantial welfare gains from alleviating both frictions, in particular switching costs, and that a well-regulated monopoly can generate similar consumer surplus as the current deregulated market.

Suggested Citation

  • Luisa Dressler & Stefan Weiergraeber, 2023. "Alert the Inert? Switching Costs and Limited Awareness in Retail Electricity Markets," ULB Institutional Repository 2013/371820, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:ulb:ulbeco:2013/371820
    Note: SCOPUS: ar.j
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    References listed on IDEAS

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    1. Oleksandr Shcherbakov, 2016. "Measuring consumer switching costs in the television industry," RAND Journal of Economics, RAND Corporation, vol. 47(2), pages 366-393, May.
    2. Daniel A. Ackerberg & Marc Rysman, 2005. "Unobserved Product Differentiation in Discrete-Choice Models: Estimating Price Elasticities and Welfare Effects," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 771-788, Winter.
    3. Andrew Rhodes, 2014. "Re-examining the effects of switching costs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 57(1), pages 161-194, September.
    4. Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 31, pages 1967-2072, Elsevier.
    5. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521766555, Enero.
    6. V. Brian Viard, 2007. "Do switching costs make markets more or less competitive? The case of 800-number portability," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 146-163, March.
    7. Guy Arie & Paul E. Grieco, 2014. "Who pays for switching costs?," Quantitative Marketing and Economics (QME), Springer, vol. 12(4), pages 379-419, December.
    8. Luis Cabral, 2016. "Dynamic Pricing in Customer Markets with Switching Costs," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 43-62, April.
    9. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-666, May.
    10. Fabra, Natalia & García, Alfredo, 2015. "Market structure and the competitive effects of switching costs," Economics Letters, Elsevier, vol. 126(C), pages 150-155.
    11. Babur De Los Santos & Ali Hortacsu & Matthijs R. Wildenbeest, 2012. "Testing Models of Consumer Search Using Data on Web Browsing and Purchasing Behavior," American Economic Review, American Economic Association, vol. 102(6), pages 2955-2980, October.
    12. Wilson, Chris M., 2012. "Market frictions: A unified model of search costs and switching costs," European Economic Review, Elsevier, vol. 56(6), pages 1070-1086.
    13. Jason Pearcy, 2016. "Bargains Followed by Bargains: When Switching Costs Make Markets More Competitive," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(4), pages 826-851, December.
    14. Steven Berry & Ariel Pakes, 2007. "The Pure Characteristics Demand Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(4), pages 1193-1225, November.
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    Cited by:

    1. Karle, Heiko & Schumacher, Heiner & Vølund, Rune, 2023. "Consumer loss aversion and scale-dependent psychological switching costs," Games and Economic Behavior, Elsevier, vol. 138(C), pages 214-237.
    2. Christina Gravert, 2024. "From Intent to Inertia: Experimental Evidence from the Retail Electricity Market," CESifo Working Paper Series 11139, CESifo.

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    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy

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