Ali Hortacsu
Many jurisdictions around the world that have deregulated formerly regulated utilities, such as electricity and natural gas, have opened retail markets to competition and allowed customers to choose their retail provider. However, inertial decision-making can diminish consumer benefits of this policy. Using household-level data from the Texas residential electricity market, we document evidence of inertial decision-making – a majority of households continue to purchase power from the incumbent despite the fact that switching to a new entrant retailer would reduce electric bills by around 8%. We estimate an econometric model of decision-making to measure the size of two sources of inertia: (1) consumer inattention, and (2) a brand advantage that consumers afford the incumbent. We find that both sources of inertia are prevalent. Households that buy from the incumbent consider alternative retailers in less than 2% of months. Even when they search for alternative providers, consumers attach a substantial brand advantage to the incumbent that discourages switching to a lower-priced retailer, despite the fact that the power is technically identical. However, this brand advantage diminishes substantially over time and becomes relatively small after several years of retail choice. Using the parameters of our model to conduct counterfactual experiments, we find that a low-cost information intervention has the potential to increase consumer surplus. These findings suggest that careful market design to address inertia during the transition to retail competition can substantially benefit consumers.