Irrationality in Consumers' Switching Decisions: When More Firms may Mean Less Benefit

By Wilson, C. & Waddams Price, C.

Abstract: This paper suggests that the ability of consumers to choose accurately between alternative suppliers is substantially limited even in a relatively simple and transparent market. Across two independent datasets from the UK electricity market we find, on aggregate, that those consumers switching exclusively for price reasons appropriated between a quarter and a half of the maximum gains available. While such outcomes can be explained by high search costs, the observation that at least a fifth of the consumers actually reduced their surplus as a result of switching cannot. We consider and reject several alternative explanations to pure decision error. July 2007 (Original Version: May 2006; second version: April 2007)