Do Consumers Switch to the Best Supplier ? July 2007

This paper suggests that the ability of consumers to choose accurately between alternative suppliers is substantially limited even in a relatively simple and transparent market. Across two independent datasets from the UK electricity market we find, on aggregate, that those consumers switching exclusively for price reasons appropriated between a quarter and a half of the maximum gains available. While such outcomes can be explained by high search costs, the observation that at least a fifth of the consumers actually reduced their surplus as a result of switching cannot. We consider and reject several alternative explanations to pure decision error.