Characteristics of the Residential LPG Market in Israel
Gas companies in Israel are divided into large companies (with a large market share), and small companies (with a small market share). Residential consumers who are supplied gas in storage tanks (where gas is streamed to a storage tank with 0.5 to 5 tons of gas buried underground), face heterogeneous switching costs when moving from one company to the other. The data indicate that consumers face a price difference in localities—a large company charges a consumer a higher price than a small company does—and that sociodemographic data at the locality level (community relations and household size) are correlated with the average prices and with the price difference in the locality. In ultra-Orthodox localities, in which there is a tendency toward community relations expressed in collaboration on consumer related issues, the average consumer price is low, and to some extent the price difference between large companies and small companies is low. In localities with large households, price differences are low, and there are relatively more companies than in localities with average sized households. In localities in which there is no presence of small companies, the prices are particularly high. To explain these empirical phenomena, a formal model with heterogeneous switching costs for consumers was developed. The characteristics of the distribution of consumers’ switching costs (expected value and standard deviation) were related to sociodemographic characteristics of the consumers (community relations and household size). It was found that the formal model’s findings support the results of the estimate of gas prices by company and locality.
The findings of the research on the effects of high switching costs on price levels are also relevant for other industries in which consumers face switching costs. The findings indicate that prices can be lowered by continued reductions in switching costs for consumers by making the information accessible to consumers and to service providers in the industry, and creating regulatory conditions for new competitors.