Estimation of Search Frictions in the British Electricity Market

Abstract

This paper studies consumer search and pricing behavior in the British domestic electricity market following its opening to competition in 1999. We develop a sequential search model in which an incumbent and an entrant group compete for consumers who find it costly to obtain information on prices other than from their current supplier. We use a large data set on prices and input costs to structurally estimate the model. Our estimates indicate that consumer search costs must be relatively high in order to rationalize observed pricing patterns. We confront our estimates with observed switching behavior and find they match well.

Power to Choose? An Analysis of Consumer Inertia in the Residential Electricity Market

“…Waddams Price, Webster, and Zhu (2013) use survey data to study demographic heterogeneity in search and switching behavior. In the most closely related paper, Giulietti, Waterson, and Wildenbeest (2014) estimate an equilibrium model of search costs to explain price dispersion in the British electricity market. Retail choice has been investigated in natural gas (Giulietti, Waddams Price, and Waterson 2005) and telecommunications (Miravete 2003).…”

A Generalized Model of Sales

“…Sorensen (2000), Lach (2002), Brown and Goolsbee (2002), Barron et al (2004), Lewis (2008), Chandra andTappata (2011), Pennerstorfer et al (2015), and Sherman and Weiss (2015), or ii) structural estimations, e.g. Wildenbeest (2011), Moraga-González et al (2013), Giulietti et al (2014), Allen et al (2014), and An et al (2015). or 'surplus' (Simester (1997), Hosken and Reiffen (2007), Wildenbeest (2011), Dubovik andJanssen (2012), Anderson et al (2015)). However, these papers only use it to compute sales equilibria in specific market settings, and do not use the associated profit function, π(u), to explore any general results or implications.…”

Non-Sequential Search, Competition and Price Dispersion in Retail Electricity

“…2 In this sense, Giulietti et al (2014) highlight that search costs represent the main reason for low switching behavior and for observing large price differences between incumbents and entrants in electricity retail in the UK. 3 In this regard, there is evidence of significant search costs.…”

“…3 In this regard, there is evidence of significant search costs. Giulietti et al (2014) point to high search costs in electricity retail in the UK, and of Hortacsu et al (2015) find that customers of the incumbent only search in about 2% of months or approximately once every 4 5 years.…”

“…5 We stress that sequential search models may have been more accurate in picturing consumers price quotations in electricity retail in the past when online comparison platforms were less prevalent and, thus, consumers had to search for information about individual firms prices. For example, Giulietti et al (2014) electricity retail market, where consumer search was mainly driven by door-to-door selling of sales representatives of the respective electricity suppliers, and thus sequential search may be an adequate model. 6 For the recent period, simultaneous search models (and in particular clearinghouse models; see Baye et al, 2006) may have become more precise due to the emergence of comprehensive online search platforms as the standard searching devices (Montgomery et al 2004).…”