How Choice Complexity in Liberalized Markets Hurts the Demand for Green Electricity

Abstract

Many countries have liberalized their residential electricity markets or are considering to do so. Liberalization provides consumers with more freedom of choice but also leads to higher choice complexity as consumers face a much larger number of different electricity contracts to choose from. We hypothesize that consumers react to this increased choice complexity in liberalized markets by applying simplified decision strategies that allow them to reduce cognitive effort. In particular, we predict that with increasing size of choice sets, consumers focus more on simple price attributes of electricity contracts and less on the relatively complex environmental attributes, leading to a decrease in the demand for green electricity. In two online experiments conducted in a representative (n=610) and a student sample (n=1,212) in Switzerland, we find that indeed when faced with a larger choice set participants focus more on prices and choose cheaper electricity contracts containing less renewable and more conventional energy than when faced with a smaller choice set. In addition, we also find evidence that a tax on conventional energy is a more effective policy instrument for shifting demand towards renewables than behavioral instruments in the form of social norm interventions. Our results suggest that a liberalization of the household electricity market has to be carefully managed such that consumers are not overwhelmed and do not shift their demand to cheaper but less environmentally-friendly energy sources.