Loyalty penalties in electricity markets

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School of Business | Master's thesis
Degree programme
76 + 8
In Economics, consumers are often assumed to be rational and to be able to take every matter affecting the end result into account in decision-making. In reality, few consumers can reach this standard. This is evident in electricity markets, where consumers do not usually shop around often for electricity contracts. Firms can take advantage of this by increasing prices above the competitive level, for example. Therefore, consumers might end up paying more for staying loyal to their current provider: this is called the loyalty penalty. In this thesis, I will present different factors potentially causing loyalty penalty in electricity markets. Especially vulnerable consumers have a higher risk of paying more loyalty penalty than consumers on average. In addition, I will analyse how age and education affect switching activity and market perceptions in the EU, in the Nordics and in Finland, and if Finnish consumers potentially suffer from the loyalty penalty. Finally, I will use OLS regressions to see how age, income and the number of inhabitants correlate with the switching rate, and moreover, how switching correlates with price variation in Finnish distribution system operator (DSO) areas. I find that higher age and lower education correlate with lower switching rates and more positive market perceptions, and that Finnish consumers might indeed pay more than the competitive price for their electricity contracts. In addition, higher age, income and population seem to correlate negatively with the switching rate of a DSO area, and a higher switching rate correlates with lower price variation.
Thesis advisor
Liski, Matti
loyalty penalty, electricity markets, market perceptions, switching, vulnerable consumers
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