Estimating Switching Costs in Electricity Retailing : Empirical Evidence from Sweden

Sammanfattning: In many situations, consumers face a cost for switching suppliers, either in monetary or in non-monetary terms. The cost associated with the switch is called switching cost and could lead to consumers that are locked-in to their current supplier. In the Swedish electricity retail market, evidence suggests that there are few switches of suppliers. Thus, one could possibly think of the switching costs to be reducing the number of supplier changes, working as a switching barrier. Two different models are used to estimate the switching costs in the Swedish electricity retail market, Shy’s (2002) “quick-and-easy method for estimating switching costs” and Salies’ (2012) developed version of the model. The estimates vary greatly, depending on the choice of model. Some of the problematic assumptions of the original model are dealt with in the latter model, which is expected to make it more credible. The results indicate that there are switching costs present in the market, and that they are much higher for the consumers of large suppliers compared to the consumers of the smaller ones. Hence, it is more costly to make a switch from a large supplier than from a smaller supplier. The estimated switching costs for a household with an annual electricity consumption of 2,000 kWh (small apartment) amount for up to 600 SEK or 1,100 SEK, depending on which model one uses. In relative terms, the switching costs could account for up to 52 % or 94 % of the annual electricity price, respectively. Although switching costs are present and make it costly for changing supplier, they cannot explain the low number of switches completely on their own. The low consumer mobility in the market might to some extent be due to the switching costs but is also likely to be depending on the low savings from switching supplier. The results in this study point in the same direction as the previous research in many aspects. However, several problems with the models are pointed out in this study, which may affect their credibility. Some of these problems are possible to correct for, while some others are not. As a consequent, the models might be overestimating the switching costs, and therefore opens for alternative methods of estimating the switching costs. Not only is there a need for other models that can estimate the switching costs in electricity retail markets specifically, but rather for all different markets.