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November 22, 2017
Refusing the power to choose
An AEJ: Economic Policy paper says that consumers were slow to change energy providers even when they had a less expensive option.
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The push to deregulate utilities has supposedly been about giving more choice for consumers. Introduce competition into local markets, and households could pick the energy company offering the best price.
In practice, however, consumers are a bit slower to change even when they could be paying substantially less for electricity.
A paper in the American Economic Journal: Economic Policy looks at what happened when Texas deregulated its electricity market in 2002. Authors Ali Hortacsu, Seyed Ali Madanizadeh, and Steven L. Puller found that consumers tended to stick with their old electricity provider for years even after they were given the option to switch to a less-expensive retailer.
Figure 1 from Hortacsu et al. (2017)
The chart above plots the prices being charged by both the incumbent provider and new entrant retailers in Texas markets. The incumbent’s price was consistently higher than several of the newer companies. And yet, the incumbent remained the dominant retailer for the first four years of deregulation.
Switching to a different retailer would have taken a consumer just 15 minutes to complete and would have reduced the average electricity bill by $100 in the first year, the authors say. And yet, for several reasons — inattention and brand loyalty — they stuck with their original provider.