Consumer Choice and Competition Policy: A Study of UK Energy Markets

Abstract

Consumer choice is increasingly recognised as a crucial factor in competition policy. To illustrate the implications of such choice we present an investment model of the switching choice in the UK residential natural gas market and examine responses to a specially commissioned survey of nearly seven hundred consumers, identifying search and switching costs. Through an assessment of the savings which consumers say they require to switch supplier, together with an evaluation of consumer switching behaviour, we deduce that the incumbent retained considerable market power, suggesting that some continued regulation may be necessary.Markets for goods previously provided by a single supplier have been opened up to competition across the world. But how competitive do they become in practice? We believe this article to be a forerunner amongst academic empirical studies of this question for a major consumer industry, formerly the province of a monopoly supplier and now opened fully to competition, namely the UK domestic natural gas market. 1 As such, it provides a useful example of the development of competition in a market and the importance of consumer behaviour in determining the extent to which any market may become competitive. The role of consumer behaviour in competition policy is increasingly recognised (Prendergast, 2002;Waterson, 2003) and is particularly crucial in markets where choice has only recently become available.Our article uses specially gathered information in the UK natural gas supply market to examine how residential consumers exercised choice, as it first became available, and the policy implications of their decisions. Through a * We acknowledge funding from the Leverhulme Trust for this research, part of a larger project

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