Loyalty Taxes in Retail Electricity Markets: Not as They Seem?

28 Pages Posted: 15 May 2020

See all articles by Bruce Mountain

Bruce Mountain

Victoria University

Kelly Burns

Victoria University

Date Written: May 14, 2020

Abstract

A common view in retail electricity markets is that retailers discriminate based on consumers’ loyalty: loyal consumers pay more. The premium is colloquially known as a “loyalty tax” or “loyalty premium”. Reflecting this understanding Australia’s governments, regulators and consumer advocates have encouraged consumers to switch electricity retailers. Using a sample of 47,114 household electricity bills we test whether consumers that had switched in the previous 12 months (“switchers”) pay less than consumers who remained with their retailers (“remainers”) in the previous 12 months. We find that the annual bills of switchers are expected to be AU$48 (4%) lower than remainers and that the median switcher could reduce their bills by 21% by selecting the cheapest offer. Classifying retailers into tiers however provides some nuance to the main conclusion: the third tier of retailers (the new entrants with market shares of less than 3%) impose higher loyalty taxes than the other two tiers (incumbents and midsized retailers). The middle tier of retailers impose the lowest loyalty tax, in fact for many consumers they may reward loyalty. These findings suggest the loyalty tax is (typically) smaller than widely considered, that it varies across tiers of retailers and that even engaged consumers typically do not select the lowest priced offers. This raises the question of whether switchers are motivated by lower bills as well as other factors or whether the main challenge is difficulties in search.

Keywords: Retail choice, search costs, loyalty tax, electricity

JEL Classification: C21, D11, D12

Suggested Citation

Mountain, Bruce and Burns, Kelly, Loyalty Taxes in Retail Electricity Markets: Not as They Seem? (May 14, 2020). USAEE Working Paper No. 20-448, Available at SSRN: https://ssrn.com/abstract=3601264 or http://dx.doi.org/10.2139/ssrn.3601264

Bruce Mountain (Contact Author)

Victoria University ( email )

Footscray Park
PO Box 14428
Melbourne, 8001
Australia

Kelly Burns

Victoria University

Footscray Park
PO Box 14428
Melbourne, 8001
Australia

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