Switching Costs, Switching Benefits and Lock-In Effects — The Reregulated Swedish Heat Market

Abstract

The paper argues for and defines a locked-in consumer as a consumer that is involuntary locked into one system in spite of an economic incentive to change. A locked-in consumer is therefore not seen as a loyal consumer but instead is assumed to be loyal to a system in spite an obvious economic gain of switching. Being defined as a natural monopoly in its technique, district heating has long been criticized for its eventual abuse of this monopoly position. Therefore, assuming well functioning ex-ante competition, the study calculates switching costs for switching from district heating to pellet burners or heat pumps. The analysis show that there exist relatively substantial benefits of switching from district heating to pellet burning or heat pumps, especially in residential urban areas. With limited available relevant markets, district heating being the only alternative, this negative switching cost cannot be capitalized and represents, in the assumed absence of loyal customers, a lock-in effect. The result indicates that we cannot reject the idea that the district heating plants serving residential areas in Stockholm misuse their dominant position resulting in a reduction of the social welfare.