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Inattention vs switching costs: An analysis of consumers' inaction in choosing a water tariff

Author

Listed:
  • Heiss, Florian
  • Ornaghi, Carmine
  • Tonin, Mirco
Abstract
This paper studies consumers' choice between two different water tariffs. We document a large inaction in a novel setting where customers face a binary decision and receive simple, detailed and personalized information about the financial savings they would obtain if they were to switch water tariff. Our empirical framework separates two sources of inertia: inattention and switching costs. The model estimates that half of the 50 thousand customers in our sample are not aware of the opportunity they are offered and that, conditional on paying attention, median switching costs are £89. A model where all customers are assumed to pay attention instead delivers implausibly high switching costs, with a median of £482. Looking at the characteristics of the households, our results confirm previous findings that areas where households have higher levels of education or the proportion of minorities is lower, display a higher responsiveness to potential savings. The new insight offered by our analysis is that it is the level of attention, and not the switching costs, that differ across levels of education and ethnicity. Our findings suggest that policies aimed at increasing attention can play a central role in fostering competition among suppliers and reducing inequalities.

Suggested Citation

  • Heiss, Florian & Ornaghi, Carmine & Tonin, Mirco, 2021. "Inattention vs switching costs: An analysis of consumers' inaction in choosing a water tariff," DICE Discussion Papers 366, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    • Handle: RePEc:zbw:dicedp:366
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    References listed on IDEAS

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    Cited by:

    1. Karle, Heiko & Schumacher, Heiner & Vølund, Rune, 2023. "Consumer loss aversion and scale-dependent psychological switching costs," Games and Economic Behavior, Elsevier, vol. 138(C), pages 214-237.

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    More about this item

    Keywords

    inattention; switching costs; tariffs; water;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water

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