Search costs and switching behaviour in the British electricity market

Abstract

This paper investigates consumer search and pricing behaviour in the British domestic electricity market since the removal of all retail price controls in 2002. We rely on estimated search costs to predict the number of consumers switching supplier in the period 2002–2005. The search costs are generated from a sequential search model in which an incumbent and a group of entrants compete for consumers who find it costly to obtain information on prices. Our predicted numbers of switchers are in line with observed switching behaviour both over time and by geographical area. We extend our predictions to the out-of-sample year 2006 and find that we over predict the number of switchers but are still able to predict regional rankings well. We ascribe this result to an increased number and complexity of the retail tariffs on offer.