Loyalty taxes in retail electricity markets: not as they seem?

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Mountain, Bruce ORCID: 0000-0002-2093-2038 and Burns, Kelly (2020) Loyalty taxes in retail electricity markets: not as they seem? Working Paper. Victoria University, Melbourne, Victoria.

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 mid-sized 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 other factors as well as lower bills or whether the main challenge is difficulties in search.

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Item type Monograph (Working Paper)
URI https://vuir.vu.edu.au/id/eprint/40252
DOI https://doi.org/10.26196/5e8d23d218959
Subjects Current > FOR Classification > 1402 Applied Economics
Current > Division/Research > Institute for Sustainable Industries and Liveable Cities
Keywords Retail choice, search costs, loyalty tax, electricity
Citations in Scopus 0 - View on Scopus
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Data Citation/Attribution

Mountain, B., & Burns, K. (2020). Loyalty taxes in retail electricity markets: not as they seem? Victoria Energy Policy Centre, Victoria University. https://doi.org/10.26196/5E8D23D218959

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