The Nordic electricity markets, including the electricity retail markets, share many fundamental characteristics. Although Iceland shares some of these characteristics with the other Nordic countries, Iceland is not connected to the European power grid and has several fundamental differences in how the electricity retail market is organized compared with the other Nordic countries. In this chapter, we shall describe some fundamental shared characteristics of the Nordic electricity retail markets. A further description of the characteristics of the Icelandic market is found in chapter 7.

The organization of the electricity retail markets in the Nordic countries is quite similar, with the Icelandic market being the exception. In all countries, the key players in this market include power producers, Transmission System Operators (TSOs), Distribution System Operators (DSOs), Balance-responsible party (BRP), and electricity retailer suppliers. They work together to ensure the functioning of the electricity retail market. Electricity production companies are enti­ties respon­sible for generating electricity from various energy sources and supplying it to consumers or selling it on the wholesale electricity market. There are several electricity production companies in all the Nordic countries, except from Iceland where Landsvirkjun produces 70 percent of the electricity production. TSOs are responsible for the high-voltage transmission of electricity from power plants to distribution networks. They also manage the operation of cross-border inter­connectors. DSOs manage the low-voltage distribution networks and deliver electricity to end-consumers. They are responsible for grid maintenance and connecting new consumers to the grid. BRPs are companies with the authorization to manage the balance responsibility for production and consumption units, as well as engage in the actual trading of electricity. BRPs are also accountable for discre­pan­cies and variations in the anticipated versus real production, consumption, and trading of electricity. Electricity retailers sell electricity directly to consumers. Retailers offer various pricing plans and services, giving consumers choices in selecting their electricity provider.

Most European electricity markets were liberalized during the 1990s. Before the electricity market liberalization, the electricity retailers owned all aspects of the electricity value chain, from production and transmission to the final distribution of electricity to customers. With the electricity market liberalization, neither consumers nor distribution companies were tied to their own power plants anymore, leading to a separation of the original monopoly – the electrical grid – and the competitive activities, such as electricity production and trading. The main goals of these reforms were to introduce competition, increase efficiency, and reduce electricity prices for consumers. The process also involved establishing a regulatory body to oversee the sector. The liberalization introduced competition in the Nordic electricity retail market, allowing consumers to choose their electricity supplier. This competition has led to innovations in pricing and services, giving consumers more options to select electricity plans that suit their needs. The unbundling process has, however, varied somewhat between the different Nordic countries. Today, there are for instance some differences regarding the degree of separation between some companies’ distribution activity, power production and retail activity.

The liberalization of the electricity market also led to the establishment of Nord Pool in 1996. Nord Pool operates as a common marketplace where electricity producers, traders, and consumers can buy and sell electricity across the Nordic and Baltic regions. This integration has led to increased market liquidity and efficiency. Nord Pool operates both day-ahead and intraday electricity markets. In the day-ahead market, market participants trade electricity for delivery on the following day. The intraday market allows for more flexible trading closer to real-time and helps balance supply and demand.

Additionally, entities can trade financial contracts on the Nasdaq exchange. The financial contracts have different durations, ranging from weeks, months, quarters, and annual agreements, with contracts including forward, futures, or options contracts, and EPADs. The financial contracts enable power traders, producers, distributors, and electricity retailers to mitigate electricity price-related risks effectively. Nasdaq Commodities exchange announced in June 2023 that they have agreed to transfer Nasdaq's operations in the electricity futures market within the Nordic region to The European Energy Exchange (EEX). EEX operates a marketplace for the futures market, spot market, and intraday market across extensive portions of the European Economic Area (EEA). Through its subsidiary, EPEX, EEX provides its members with the ability to engage in trading activities within the spot and intraday markets in Norway and the broader Nordic region. Nord Pool has also stated that they are considering establishing a financial trading platform.

In addition to Nasdaq, trading with standardized contracts can occur on what is known as OTC (Over The Counter), where a broker serves as an intermediary or facilitator. Market participants often prefer exchanges over OTC agreements if exchanges are efficient and have good liquidity. However, if liquidity is low, those in need of price hedging typically use OTC-agreements. OTC-agreements can also be tailored to the specific needs of market participants, and thus be preferred over financial markets. This can for instance be the case if a market participant needs particularly long contracts, or full hedging against differences between the area prices and system prices. The financial markets, however, have positive externalities through the establishment of reference prices for the expected long-term power price that everyone can use in their investment and operational decisions, and as a reference to OTC-agreements.

The energy crisis has contributed to decreasing liquidity in the financial markets. Because of significant variations in the area prices, the products in the financial markets have become less relevant. In addition, they have become more expensive because of high collateral requirements, and typically higher than for OTC trading. Thus, OTC trading has become increasingly common in the Nordic market and is today relatively common for futures contracts that hedge the price in a specific bidding area. OTC trading represents both competition and a supplement to power exchanges like Nasdaq and EEX and is considered a part of the futures market.

The organization of the retail markets in the Nordic countries is quite similar, apart from Iceland. Private customers and business customers purchase electricity for their own consumption through an electricity supplier or a broker. Entities that sell electricity in the retail market acquire electricity in the wholesale market, which they then sell to their customers. Some larger end-users such as major industrial companies, trade directly in the wholesale market or through bilateral agreements with electricity producers, and they do not fall within the scope of the retail market.

Electricity suppliers and consumers have contractual agreements outlining the amount of electricity to be bought and sold. Electricity suppliers bear the responsibility for any imbalances between production and consumption that may arise. BRPs manage discrepancies between production and consumption, ensuring that the difference is zero, which is crucial to maintain grid stability.

Electricity suppliers are not responsible for the physical delivery of electricity. It is the DSOs that ensure the customers’ access to the market by connecting them to the electricity grid and distributing electricity to customers. In addition to the payment of electricity to the chosen electricity supplier, customers must also pay a grid fee and taxes to their local DSO for the distribution of power. Distribution network companies operate as local monopolies and are subject to monopoly regulation. These monopoly regulations cover, for instance, the price setting of tariffs and terms for accessing the grid. Therefore, in the retail market, there is a distinction between monopoly activities (conducted by the distribution network company) and competitive activities (conducted by the electricity supplier).

In the electricity retail markets, various regulatory and consumer actors play essential roles in ensuring fair competition, consumer protection, and the overall functioning of the market. Here are some of the key regulatory and consumer actors typically involved:

The National Regulatory Authorities (NRAs) in the Nordic countries are responsible for regulating, monitoring and improving the functioning of electricity markets. They typically aim to ensure a user-friendly and efficient retail market, occasionally imposing fines for breaches. They can propose, and in some of the countries approve, regulations. In Iceland, laws must be approved in parliament and regulations by the ministry. Typically, the NRAs also enforce specific sector regulations regarding consumer rights.

The Consumer Authorities in the Nordic countries function as supervisory authorities that work to make the electricity markets simpler and safer for consumers. The Nordic Consumer Authorities are responsible for monitoring the business practices and contract terms of traders. Their primary focus is on preventing and stopping illegal marketing, unfair contract terms, and other forms of unlawful trading practices directed towards consumers. The Consumer Authorities can impose various types of financial sanctions, either infringement fines, penalty payments, or both. There are also a National Board for Consumer Disputes in the Nordic countries that handles complaints arising from contractual relationships between energy companies and consumers.

Furthermore, there are also Consumer Councils in the Nordic countries that represent the consumer interests and influence businesses and government authorities to become more consumer-friendly. The Nordic countries typically also have industry organizations to represent electricity retailers that are members of the organization. Their goal is to forward the mutual interests of its members, guard their interests in mutual projects, foster research and gather information for its members as well as for public authorities, hosting seminars and conferences and acting on behalf of the members. The industry organizations in Denmark and Norway have industry standards such as the standard electricity supply agreements. In Denmark, this regulates the cooperation between grid companies and electricity suppliers. The standard electricity supply agreement in Norway provides a summary of the rights, which consumers and businesses have under current legislation and practices.

The Competition Authorities also play a role in the electricity markets by working to promote competition for the benefit of consumers and businesses. In their daily operations, the Competition Authorities have limited involvement in the retail electricity market. However, they are, for example, involved in acquisitions and mergers among electricity retailers, and they typically comment on proposals or activities that influence the competition in the electricity retail market.

The regulatory framework governing the electricity retail market in the Nordic countries is designed to ensure fair competition, protect consumers, and promote the efficient functioning of the market. The main regulations that cover the electricity retail market generally involve an electricity market act, a marketing act, and a price information act. Additionally, there may be other laws specific to each country.

An electricity market act typically specifies the need of a license from the regulatory authority for engagement in trading of electrical energy. Furthermore, it introduces requirements for the structural and functional separation of vertically integrated companies. All Nordic countries have implemented measures to split up traditionally vertically integrated companies, but the degree of vertical integration with production and/or grid companies varies.

Most regulations concerning information to the consumers in the electricity retail market fall under general marketing or consumer protection acts. These laws typically lay out the general consumer protection for contracts and states that the seller must use good market practice and that unfair trade practices are illegal. The consumer authority in each country holds the authority to impose financial sanctions on entities found to be in violation with the marketing act. Notably, while households benefit from consumer protection, the same level of protection is not extended to SMEs in all the Nordic countries. This particularly applies to Finland and Norway, where the customer rights of SMEs are limited in comparison to households. Legislation pertaining to the protection of non-household consumers is, in practice, nearly non-existent. Additionally, regulations in the Nordic countries encompass requirements for invoicing information and the procedures for entering into agreements, typically outlined in regulations on settlements.

In the last two years, starting from the second half of 2021 and into 2023, there was an unexpected and significant increase in electricity prices in the Nordic countries and in Europe in general. The primary reason for this was the energy shortage resulting from Russia's invasion of Ukraine. The war in Ukraine also unfolded concurrently with a more long-term climate-driven transformation of the energy landscape in Europe, gradually phasing out both coal and nuclear power, while actively introducing renewable electricity as a replacement.

The energy crisis did not impact the physical distribution of power; electricity remained available but at an elevated cost. In addition to the price shock that customers suddenly experienced, leading to the implementation of electricity support schemes in several countries, a major challenge was the low liquidity within the financial markets and the retail supplier’s ability to hedge their portfolio.

Most market participants in the Nordic electricity retail market have traditionally used the system price to hedge their portfolio and take the risk that the difference between the system price and the price in the bidding area does not fluctuate more than what the retail supplier can tolerate. This has been a common practice due to the relatively low variations in the area prices compared to the system price. The system price is a computed index based on bids in the spot market for Norway, Sweden, Denmark, and Finland and does not provide the same rights for physical delivery. The system price does, however, not consider the different area prices due to constraints within the Nordic countries’ power grids. The term often used for the current electricity price in a specific bidding area is the area price. If a market participant has bought or sold electricity on NASDAQ, they have the option to physically deliver electricity at the prevailing area price in that particular region. Norway has five bidding areas, Sweden has four, and Denmark has two, while both Iceland and Finland only have one.

During the energy crisis, the Nordic electricity retailers did not find it sufficient to hedge only the system price due to the vast fluctuations in the different price areas. Electricity retailers in specific bidding areas thus wanted to hedge a larger volume in their own area in addition to the system price. The electricity retailers therefore needed a contract for the system price as well as an agreement for the difference between the system price and the price in the bidding area of interest. The market for futures contracts based on the system price has been efficient and liquid because there are more participants who want to hedge their price exposure to the system price rather than to individual bidding areas. The agreement that provides price hedging in a bidding area is called EPAD (Electricity Price Area Difference). EPADs are potentially available for each bidding area in all the Nordic countries. There are fewer participants interested in any EPAD than there are in contracts based on the system price. This poses a significant risk that the market for each individual EPAD contract is inefficient and lacks liquidity. The lack of liquidity in the financial markets thus posed a significant challenge for the electricity retailers during the energy crisis in terms of the ability to effectively hedge their portfolio. This made it, for instance, challenging for electricity retailers to offer attractive fixed price agreements to their customers.

Over the last decade, the liquidity in the financial futures markets have been steadily decreasing regardless of the energy crisis. The negative trend began when American entities withdrew from Europe in the aftermath of the financial crisis in 2008. To reduce the risk of a future financial crisis, Europe gradually introduced requirements that clearing of exchange-traded futures contracts had to be backed by cash or exchange-listed securities, and that the market would no longer accept bank guarantees. Following this change, liquidity declined. The price shock during the energy crisis in 2021 did, however, further weaken the liquidity in the market. This has led to a gradually shift towards bilateral agreements.

An efficient retail market for electricity brings value to the society through ensuring that the needs of the end-users are met efficiently. Furthermore, as explained above, the retail market also constitutes the financial link between the end-users and the producers, while the distribution network constitutes the physical link. In addition to having direct negative effects on the end-users, disturbances or inefficiencies in the retail market may therefore reduce the efficiency in the power system as a whole. Thus, efficient retail markets are of great importance.

An efficient production level is characterized by the consumers’ marginal willingness to pay for an increased consumption that equates the producers’ marginal cost of expanding the production. As the retailers buy electricity in the wholesale market and sell it in the end-user market, the functioning of the market will determine the difference between the cost of producing – and consuming electricity. The bigger the difference, the bigger the dead-weight loss due to too little production for the given willingness to pay for increased consumption.

Market power will typically result in high mark-ups and thus increase the difference between the cost of producing and consuming energy. In addition to high mark-ups, both fixed and variable costs at the retail level will typically increase the difference because the suppliers need to cover their costs of operating. Competition is considered an effective means of ensuring low costs and mark-ups. To attract customers, the suppliers have incentives to reduce the prices, which implies lower mark-ups for a given variable cost. Suppliers with low costs can more profitably reduce prices. Thus, all things being equal, suppliers having low costs can be expected to capture a larger share of the market than suppliers with high costs – thereby creating incentives for cost efficiency.

In a competitive environment, innovations that create an advantage relative to other players are highly valuable.   Furthermore, inefficient suppliers will obtain too low margins and sales to cover their fixed costs and thus leave the market, while entry will occur if outsiders more efficiently than established players can serve customers. Hence, given that the competition works as intended, the result will be an efficient retail market, characterized by low costs and mark-ups, and innovations that can further reduce costs or increase the value of the product to the customers. For the competition to work as described, several conditions need to be met. They are described below.

First, barriers to entry should be low so that entry actually occurs if the profit opportunities in the market increase due to weak rivalry or if outsiders can operate with lower costs. Second, no supplier should enjoy an artificial advantage – for instance due to regulations allowing a supplier to operate with higher costs or charging higher mark-ups than those of other established or potential suppliers. Furthermore, as a situation with zero entry costs is impossible in practice, the threat of future entry is normally not sufficient to ensure a competitive outcome in the short run. Thus, rivalry between established suppliers normally matters. All things being equal, the rivalry increases with the number of suppliers, which implies that the number of suppliers should be sufficiently high.

As the rivalry for customers is the motor of competition, the suppliers need to have capacity to serve an increased number of customers and the consumers need to respond to more attractive offers. If capacity restrictions bind a supplier, it has low incentives to improve its offers as it cannot serve more customers. It also increases the market power of its competitors, as they face less risk of losing customers if they increase their prices. Thus, capacity restrictions are a source of market power.

Responsive consumers require search and transaction costs that are not too high. If the search costs are high, the consumers have low incentives to perform search, which in turn makes it harder for the suppliers to win customers by improving their offers. Hence, search costs at the consumer level reduce rivalry at the supplier level. Likewise, if the transaction costs are high, an alternative offer must be substantially better to make up for the consumer’s costs of contracting with a new supplier. This reduces the consumers’ incentive to search for better deals, making the demand facing each supplier less elastic. In a situation with high transaction costs, the suppliers may thus have weak incentives to reduce prices in order to win new sales. Hence, search and transaction costs both have a chilling effect on the rivalry among suppliers and is a source of market-power.

Electricity is a scarce resource, a basic necessity and crucial for the functioning of the society as a whole. Production and use of electricity must be balanced in all areas, in all time frames. Furthermore, the necessary transition to more renewable energy production implies integration of a more volatile production, increasing the need for flexibility in the consumption. All this has implications for the requirements to the retail market.

As delivery of energy is crucial for the society, a temporal breakdown of the market will have considerable consequences. Hence, the market must be resistant to different kinds of shocks. To enhance efficient use of scarce and volatile production resources, it is important that the retail market conveys short- and long-term price signals to both producers and end-users. Furthermore, the retail market should be able to adjust to challenges that may arise due to decarbonisation and technological changes at both the production and consumption side. This implies among other things that the market should facilitate innovation, i.e. that the suppliers are able to provide new products and services to the consumers and adopt new technology to serve the consumers more efficiently.

Even though electricity is a basic necessity, the end-users may have heterogeneous preferences for their contracts for delivery of electricity. This implies that the end-user market should provide a product range that caters well for heterogeneous needs – for instance end-users with different consumption levels and costs of bearing risks. It also requires for systems and means to be in place, so that no consumers are excluded from participating in the market.

Competition may contribute to efficiently conveying price signals, innovation and product variety. However, even perfect competition may not necessarily give the desired outcome. For example, profits are normally low in a competitive market, which may make the market vulnerable to shocks. The market conditions may limit the unregulated competition, and in the presence of market failure, the unregulated market will not provide the most efficient allocation and use of resources. For example, in markets with severe information asymmetry, customers will not necessarily be able to choose contracts in line with their preferences, thus reducing the competition on important factors such as price and quality. Hence, it may be necessary to complement competition with regulation to obtain an efficient market in line with important policy goals.

Promoting competition to facilitate efficient utilization of resources and benefits to consumers is a strategy applied in most markets in a free-market economy. However, how unregulated competition leads to the desired outcome and whether the outcome may be improved by regulations, depend on the underlying conditions of the market in question.

The underlying product, electricity, is a homogenous product and the delivered electricity is not affected by the choice of retailer. This limits the opportunities to build market power through differentiation related to the underlying product. However, in the retail market, the products traded are in fact contracts, which are differentiated through terms. Thus, the retail market itself cannot be characterized as a homogenous commodity market.

Furthermore, the electricity retailers use marketing and add-on services to create actual and perceived differentiation. Hence, from an analytical perspective, the market should be treated as a differentiated commodities market, where the retailers are price-setters. However, some differentiation variables, i.e. contract terms, are not protected by intellectual property rights. This implies that contracts may easily be copied.

At least in most traditional retail markets, significant investments are necessary to enter the market. This may stem from setting up stores and logistic operations, investments in technology and capacities. It may also be necessary to have physical presence close to the customer, making expansion very costly. However, presence close to the customer is of low importance in the retail market for electricity relative to other retail markets. Furthermore, there is no cost associated with physical infrastructure or logistics. The set-up costs are limited to IT-systems and an office from which to run the operations. Being a retail market, the structural barriers to entry should be considered low. However, to supply contracts, license and deposits are required. Thus, regulatory barriers to entry come in addition to the relatively low structural barriers to entry. Although there are low barriers to entry, there are higher costs related to growing. There are significant capital requirements needed to trade electricity for many customers, comply with the balance responsibility and the guarantee requirements that one undertakes when trading in the wholesale market and possibly also on the stock exchange or bilaterally, and also towards the DSOs if the power supplier is responsible for invoicing on behalf of the DSO.

As no retailer has a real advantage of distance in the market for electricity, having a strong brand may be more important than in other retail markets. This is reflected in the electricity retailers’ investments in marketing and advertising, which contribute to advantages of scale in the industry. However, due to price comparison tools, it is possible to inform potential customers about an offer without heavy investments in marketing and advertising. Customer support and billing are other important activities for the electricity retailers, but the costs associated with these activities are probably to a rather high degree correlated with the number of customers. In the retail market for electricity, economies of scale are most likely smaller than in most other retail markets – where such advantages may stem from logistics, procurement etc. in addition to marketing and support activities.

Compared to many retail markets, products are less prone to differentiation, while both economies of scale and entry costs are lower. This implies that the supply side in the retail market for electricity seems conducive for well-functioning competition.

Turning to the demand side of the market, there are also conditions that depart from more standard retail markets. In many markets, there are natural triggers for consumer activity – the consumers need for example to buy groceries regularly. Such triggers do not exist in the retail market for electricity. Electricity is a subscription-based commodity, which implies that when the consumers have signed a contract, they can in theory consume electricity for the rest of their life, or at least until moving to another apartment or house, without undertaking further activity.

Electricity is a commodity that is consumed indirectly, through units that run on electricity. This implies that the consumers’ lack a natural source of information about their consumption. Thus, it requires activity from the consumer to obtain an understanding of what drives the total consumption. However, just as there are no natural triggers for purchasing activity, there are no natural triggers for gathering information about consumption. If the consumers are not aware of their consumption, it may be difficult for them to identify possible gains from actively searching for a new contract. This may limit the incentive to search in the first place. Furthermore, lack of information about consumption may complicate the search for an appropriate contract.

As explained above, the electricity retailers use contract terms as a means of differentiation. Furthermore, different contracts and terms are also a result of heterogeneous preferences and needs, while low barriers to entry may result in many suppliers. Thus, three drivers contribute to a large selection of contracts. A large number of contracts may, however, increase the search cost for the consumers, as well as introducing a (perceived) risk of choosing a contract that does not match one’s actual need. This may also reduce the incentive to search in the first place. Furthermore, the total cost of consuming electricity depends on several prices. Some of these prices depend on the contract with the retailer, and some do not. This contributes to a complexity, which in turn may result in the consumer finding it difficult to identify possible gains from switching supplier or contract.

In addition to no natural activity triggers and rather high search costs, electricity has traditionally constituted a small share of the consumers’ total budgets, which alone may reduce incentives to undertake costly search. Thus, from the consumers’ point of view, there are several conditions in the retail market for electricity that may have contributed to making electricity contracts a low interest product for a large group of customers.

In many retail markets, the electricity retailers lack both information about who are active and dormant and may lack possibilities to discriminate between the two groups. Thus, dormant customers may in practice benefit from the rivalry of active customers. In the retail market for electricity, however, the suppliers may deduct what type a given consumer is, for example from the customer’s history. Furthermore, the retailers may launch new and attractive contracts to compete for active customers, while the dormant customers are moved to unattractive contracts. Hence, dormant customers are to a lower degree protected by the existence of active customers in the retail market for electricity.

Inactive consumers and search costs, are sources to market power that may affect the suppliers’ strategies, for instance by increasing their incentives to invest in customer acquisition to win customers that can be ripped-off down the road. In combination with low entry barriers and high complexity for consumers, these factors may also create an environment where short-sighted retailers aim to capture uninformed customers and exploit them through contracts with unbalanced terms.

On the demand side, search costs and low awareness seem like conditions that may affect the competitiveness of the retail market for electricity. Although actual transaction costs related to switching are low, for instance due to  price-comparison insights, smart-meters for digital reading of consumption, data hubs for information sharing, and regulations ensuring that suppliers take the necessary steps to transfer the costumer from one supplier to another, the perceived transaction costs may be high for consumers with low experience. However, the energy crisis received much attention in media and among consumers and had a significant impact on the consumers’ budgets. Because of that, the consumers as a whole may have gained more insight into the market for energy, including the retail market for electricity. Thus, a long-term effect of the energy crisis may be higher awareness among the consumers.

The above discussion indicates that the retail market for electricity in theory may have some underlying conditions that adversely can affect the efficiency of the market, where inactive customers and search costs are the most prominent. This implies that an evaluation of retail markets should in particular assess implications of behaviour on the demand side.

A well-functioning market should provide the customers with the goods in demand, by using as few resources as possible. Competition is considered the most effective means of efficient utilization of resources, and all the Nordic electricity retail markets are deregulated and open to competition. According to standard economic theory – see for instance Becker (2015)

Becker, G., (2015), ”Perfect Copmetition”, Wiley Encyclopedia of Management

– the conditions contribute to well-functioning competition, and a low degree of market power can be summarized as:

When competition is fierce, the firms’ ability to raise prices is generally low. However, a supplier that has a better product may charge a premium for this, and firms that are more efficient may operate with higher mark-ups. This incentivizes firms to be cost efficient, innovative and to respond to signals from the demand side. Thus, well-functioning competition facilitates that heterogeneous preferences are catered for.

Economic theory considers market power as the ability to price above costs, which implies that the price-cost mark-up is often assumed to be a good proxy for market power. Thus, in a competitive market, the firms have little market power. However, measuring market power directly is not straightforward in all industries, and data are not necessarily available. Furthermore, the suppliers need to cover their fixed costs – including a normal return on capital. The price-cost mark-up that supports coverage of fixed costs and a normal return on capital will thus vary between industries. Considering one particular industry, increased mark-ups over time are not necessarily a sign of a less competitive market. If, for instance, one or a couple of firms become more efficient than the other firms in the industry, they may be able to increase their mark-ups despite increased rivalry in the market in general.

Thus, to assess the competitive situation, it is often necessary to take a holistic approach and to take several variables into account. In this report, we will assess the competitive landscape based on:

If the consumers have many suppliers that they consider as relevant alternatives, this should at the outset discipline the suppliers and contribute to a competitive market. However, ‘relevant alternatives’ implies that concentration may be a more informative measure than the actual number of registered suppliers, as concentration takes into account what suppliers the consumers actually have chosen and may thus provide a better measure on the set of relevant alternatives.

In a perfectly competitive market, it would only be rational for the consumers to switch if their supplier become unavailable, for instance because the supplier leaves the market or the consumer moves. Thus, consumers switching activity is not in itself a perfect measure of rivalry. However, few markets are characterized by perfect competition. In a market where consumers are active, both in terms of searching for better offers and willingness to switch, the scope for exploiting market power may be limited. On the other hand, if the consumers perceive the search and switching costs to be high, there may be scope for exploring market power. Thus, we will assess switch and search activities.

The consumers’ needs and preferences vary. If the market is well-functioning, the consumers should find contracts that match their needs and preferences from several suppliers. If they do not find any contracts, there may be practical obstacles related to providing the contract or the innovation incentives may be inefficiently low. If few suppliers provide the relevant contracts, competition for customers demanding the contracts may be limited, and the contracts priced too high.

It is well known that the customer satisfaction is rather low in many electricity retail markets. Unfortunately, economic theory provides limited guidance on how to interpret negative experiences. In a dynamic setting with imperfect information about product quality, competition may incentivize behaviour that creates a good reputation. Hence, negative experiences may simply stem from suppliers exploiting market power, but there are also other possibilities. For instance, in a highly competitive market, profit margins are low, which reduces the cost of losing customers. It may therefore be tempting for suppliers to exploit customers, for instance by providing lower quality than advertised – see e.g. Armstrong and Chen (2009)

Mark Armstrong, Yongmin Chen (2009), Inattentive Consumers and Product Quality, Journal of the European Economic Association, Volume 7, Issue 2-3.

. Moving customers to less attractive contracts may be one example of cheating with the level of quality. More suppliers may also create incentives to make price signals noisier – see Spiegler (2006)

R. Spiegler (2006) Competition Over Agents with Boundedly Rational Expectations, 1(2) THEORETICAL ECON. 207-31.

– which may result in more negative experiences as customers end up paying more than expected.

Despite complicated relationships, most models predict the prevalence of negative experiences to decrease with the share of active and informed customers. Thus, in our assessment of the competitive landscape we will consider both the prevalence of negative experiences, the type of negative experiences and how consumers typically respond to negative experiences.

Subscription-based industries may be characterized by win-back activities. However, the ability and incentive to spend resources on convincing a leaving customer to stay, will typically increase the profit margin. Furthermore, the opportunity to win back customers may have a chilling effect on the incentive to charge existing customers competitively. Thus, a high level of win-back may indicate market imperfections.