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

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 data set 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.