Benefits and costs of introducing tariff choice in uncontested markets – A Report for Ofwat

Catherine Waddams Price, Kerry Clayton, Catherine Webster

Research output: Working paper

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1. Theoretical models indicate that allowing a regulated company to introduce optional (or self selecting) tariffs can make individual consumers (and consumers on average) better off and be profitable for the company, as long as the original (regulated) tariff remains available to all consumers.
2. The models contain some restrictive assumptions and limitations and may be difficult to apply in practice.
3. One particular assumption crucial to the benefits is that consumers choose the best tariff for themselves. More recent research on consumer behaviour in general and in utilities in particular show that this may not be the case. Much of the market literature has been concerned with the telecoms and energy markets.
4. There may be distributional concerns if some consumer groups are less likely to choose well, particularly if there are likely to be long term effects on the ‘base’ tariff. Such concerns are reflected in the current British energy regulator’s consultation on reducing tariff choice for both suppliers and consumers as a response to perceived failure of competition. This experience raises questions about the intrinsic value of choice for consumers.
5. Experience of optional metering in England and Wales provides some evidence of how residential water consumers have responded to that particular tariff choice. Other evidence on water consumer perceptions indicates that the assumptions made in theoretical models of tariff choice may not be applicable to this market. This may affect the applicability of welfare assessments made in the models.
6. We conclude by identifying some questions about the circumstances in which allowing optional tariffs (alongside a regulated base) is likely to be beneficial.
Original languageEnglish
Place of PublicationBirmingham
Publication statusPublished - Oct 2011

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