The gulf between theoretical, efficient markets and real markets never ceases to surprise me. This paper from 2005 evaluates the saving consumers were able to make on their power bill by switching plans:
…we find that the subsets of consumers who claimed to be switching exclusively for price reasons appropriated only between 26-39% of the maximum gains available through their choice of new supplier. While such behaviour can be explained by the existence of high search costs, the observation that 27-38% of the consumers actually reduced their surplus as a result of switching cannot.
Yes, among people who switched to save money they only saved a third of what was available to them. A third of the people who switched actually increased their bill. The authors rule out a number of explanations to conclude that these people just got it wrong because figuring out optimal tariffs is quite tricky. And these are the people who are actively switching and evaluating tariffs, so this is what market success looks like!Outcomes like this make us instinctively want to provide some sort of expert assistance or intervention to help these people. Unfortunately, regulating to ‘fix’ problems like this one is exceptionally difficult because every household has different needs. What it might point to is the need for thoughtful default options because, when engaged consumers are this poor at selecting the best option, what hope is there for those who are not actively comparing tariffs?