Default vs. Active Choices: An Experiment on Electricity Tariff Switching

FCN Working Paper No. 7/2020

31 Pages Posted: 12 Aug 2020

See all articles by Ayse Tugba Atasoy

Ayse Tugba Atasoy

RWTH Aachen University - Institute for Future Energy Consumer Needs and Behavior (FCN)

Reinhard Madlener

RWTH Aachen University; Norwegian University of Science and Technology (NTNU)

Date Written: May 1, 2020

Abstract

In distinct decision environments,consumers often fail to financially optimize their decisions. In liberalized electricity markets, consumers frequently do not optimize their electricity choices and stick with the default providers instead, despite the ability to choose among an increasingly large set of electricity suppliers and benefit from lower cost options. In this paper, we study the effect of different contextual features of the choice environment (i.e., default and active choice enforcement) and search costs (i.e., high and low) on the quality of electricity contract choices, with the help of a randomized controlled laboratory experiment. We provide evidence that the default contract rule lowers the decision quality compared to the active decision rule in both search cost environments. Default rules lower the quality of contract choices especially for the individuals with lower cognitive ability. Contrary to the expectations, we observe that the number of alternatives has no effect on the quality of electricity contract choices. Our findings have important implications for regulatory rule setting in the electricity market.

Keywords: Contract Switching, Electricity Contracts, Default Rules, Search Costs, Decisionmaking

JEL Classification: C91, D91, D12, Q48

Suggested Citation

Atasoy, Ayse Tugba and Madlener, Reinhard, Default vs. Active Choices: An Experiment on Electricity Tariff Switching (May 1, 2020). FCN Working Paper No. 7/2020, Available at SSRN: https://ssrn.com/abstract=3662969 or http://dx.doi.org/10.2139/ssrn.3662969

Ayse Tugba Atasoy (Contact Author)

RWTH Aachen University - Institute for Future Energy Consumer Needs and Behavior (FCN) ( email )

Mathieustrasse 6
Aachen, 52074
Germany

Reinhard Madlener

RWTH Aachen University ( email )

School of Business and Economics / E.ON ERC
Mathieustra├če 10
Aachen, 52074
Germany
+49 241 80 49 820 (Phone)
+49 241 80 49 829 (Fax)

HOME PAGE: http://www.eonerc.rwth-aachen.de/fcn

Norwegian University of Science and Technology (NTNU) ( email )

H├Şgskoleringen
Trondheim NO-7491, 7491
Norway

HOME PAGE: http://https://www.ntnu.edu/employees/reinhard.madlener

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