Working Paper: NBER ID: w20988
Authors: Ali Hortasu; Seyed Ali Madanizadeh; Steven L. Puller
Abstract: Many jurisdictions around the world have deregulated utilities and opened retail markets to competition. However, inertial decisionmaking can diminish consumer benefits of retail competition. Using household-level data from the Texas residential electricity market, we document evidence of consumer inertia. We estimate an econometric model of retail choice to measure two sources of inertia: (1) search frictions/inattention, and (2) a brand advantage that consumers afford the incumbent. We find that households rarely search for alternative retailers, and when they do search, households attach a brand advantage to the incumbent. Counterfactual experiments show that low-cost information interventions can notably increase consumer surplus.
Keywords: Consumer Inertia; Retail Choice; Electricity Market; Econometric Model; Information Intervention
JEL Codes: D8; L0; L5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| search frictions due to inattention (D91) | reduction in the probability of switching (C34) |
| brand advantage of the incumbent retailer (L81) | preference for the incumbent (D79) |
| brand advantage diminishes over time (L15) | learning process among consumers (D16) |
| information intervention (L86) | increase in consumer surplus (D11) |
| low frequency of searches among incumbents (L96) | significant inertia in switching (C69) |