Measuring Switching Costs in the Italian Residential Electricity Market

Following Shy (2002), we develop a simple model to determine consumers’ switching costs in the liberalized residential electricity market. By exploiting an original dataset on electricity prices and consumers in Italy, we use the theoretical predictions to measure consumers’ switching costs across the three main firms acting in the liberalized market. Our empirical results confirm the theoretical prediction that firms in the liberalized market are posting lower prices than the regulated one. Consumer decisions are found to be heavily affected by switching costs; our results show that the number of consumers in the regulated market negatively influences them. Switching costs appear to be particularly relevant for the incumbent firm while they are of lower magnitude for competitors – a result consistent with reputation playing a significant role in influencing customer switching.