Loyalty taxes in retail electricity markets: not as they seem?
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Loyalty taxes in retail electricity markets: not as they seem? Bruce Mountain1
· Kelly Burns1
Accepted: 21 October 2020 © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract A common view in retail electricity markets is that retailers discriminate based on consumers’ loyalty: loyal consumers pay more and switchers can (and do) select the cheapest offers) when they switch. 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 mid-sized retailers). The middle tier of retailers impose the lowest loyalty tax, and in fact for many consumers they may reward loyalty. These findings suggest that the loyalty tax is (typically) smaller than widely considered, it varies across tiers of retailers and even engaged consumers typically do not select the lowest priced offer. This raises the question of whether switchers are motivated by lower bills as well as other factors or whether the main challenge is search difficulties. Keywords Retail choice · Search costs · Loyalty tax · Electricity JEL Classification C21 · D11 · D12
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Bruce Mountain [email protected] Victoria University, Melbourne, Australia
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B. Mountain, K. Burns
1 Introduction The retail electricity market in the state of Victoria, Australia, was opened to competition in 2003, with all price controls withdrawn in 2009. Between 2009 and 2016 Victorian retail electricity prices rose by 84 in real terms (Australian Bureau of Statistics 2017). Consequently, Victoria’s retail electricity market has attracted substantial attention from economists and commentators (for example (Australian Competition and Consumer Commission 2018; Ben-David 2018; B. Mountain 2015; Thwaites et al. 2017; Woods and Blowers 2017). A common belief in Australia is that electricity retailers discriminate on the basis of consumer loyalty. Consumers who are engaged in the market and switch to cheaper deals (the “switchers”), pay less than loyal consumers (the “remainers”). The premium paid by loyal consumers is often referred to as a “loyalty tax” or “loyalty premium” or alternatively the absence of a “loyalty discount” (see for instance (Australian Competition and Consumer Commission [ACCC] 2018b; Potter 2016). Loyalty taxes have also been sug
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