Consumer Behavior and Competition in Retail Electricity Markets
Summary
Retail electricity markets worldwide have shifted from vertically integrated monopolies towards liberalised structures in which consumers can choose among multiple suppliers. This transition has fundamentally altered consumer decision-making, introducing considerations of price, service differentiation, contract complexity and environmental attributes. Consumers face search costs when seeking information on tariff structures and switching costs when changing suppliers, which can inhibit active engagement and dampen competitive pressure. Suppliers respond by deploying marketing strategies, offering differentiated products such as green energy packages, and designing default tariffs to retain existing customers. Regulatory frameworks play a pivotal role in shaping these dynamics: policies that mandate clearer information disclosure, impose price caps on default offerings or streamline switching procedures can lower barriers to entry and encourage consumer mobility. At the same time, supplier retention tactics—loyalty discounts, bonus periods or bundled services—can both strengthen customer relationships and inadvertently sustain market power. Understanding the interplay between consumer behaviour, supplier strategies and regulatory interventions is essential for ensuring that liberalisation delivers lower prices, higher quality and greater innovation in the retail electricity sector.
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Consumer Behavior and Competition in Retail Electricity Markets publication trend
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Technical terms
Search costs: The time, effort and monetary expense incurred by consumers when comparing tariffs and services across multiple suppliers.
Switching costs: Financial or procedural barriers that consumers face when moving from one supplier to another, including termination fees or administrative hurdles.
Default tariff: The standard electricity tariff applied when a consumer does not actively choose a competitive offer, often subject to regulatory price caps.
Retention actions: Strategies deployed by suppliers—such as loyalty discounts or bonus periods—to discourage customers from switching away.
Price dispersion: Variability in retail electricity prices across suppliers, reflective of product differentiation, market power and consumer search frictions.
References
- Consumer's behavior determinants after the electricity market liberalization: the Portuguese case. Green Finance (2022).
- Switching Energy Suppliers: It’s Not All About the Money. The Energy Journal (2021).
- The combined effect of regulators’ and retailers’ actions to stimulate consumer participation in retail energy markets. Energy Policy (2024).
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