Business Intelligence

Estimation Of Search Frictions In The British Electricity Market

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Executive Summary

This paper studies consumer search and pricing behavior in the British domestic electricity market following its opening to competition in 1999. The authors develop a sequential search model in which an incumbent and an entrant group compete for consumers who find it costly to obtain information on prices other than from their current supplier. They use a large data set on prices and input costs to structurally estimate the model. Their estimates indicate that consumer search costs must be relatively high in order to rationalize observed pricing patterns. They confront the estimates with observed switching behavior and find they match well.

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