How Loss Aversion Combines with Past Results or Convenience to Explain Choosing Fixed-Price Contracts: A Qualitative Comparative Analysis of Alberta Electricity Buyers

Abstract

This thesis explores the decision behavior of individuals representing commercial and industrial companies operating in Alberta that led to the choice of a fixed-price electricity supply contract. Survey responses were received from 74 individuals and Qualitative Comparative Analysis (QCA) was employed to determine the configurations (i.e. combinations of conditions) associated with the choice of the fixed-price contract. Two meaningful configurations, each containing four conditions, were identified. The first configuration contained the unfavorable financial impact of higher prices, an expectation of the future price of electricity, the known price for the contract term, and the negative previous financial results. The second configuration comprised three of the same conditions in the first configuration, the unfavorable financial impact of higher prices, an expectation of the future price of electricity, the known price for the contract term, with the addition of the ease of retention. The desire to avoid a potentially adverse financial outcome resulting from higher future electricity prices with the certainty afforded by the fixed-price contract is suggestive of loss aversion. The additional influences of the negative previous financial results and the ease of retention indicates that generalizations of loss aversion are not as definitive as in laboratory experiments. The results of this study suggest Retail Energy Providers should concentrate their marketing efforts on evoking loss aversion to increase the contracting for the substantially higher value fixed-price product. Marketing should emphasize the risk of higher future variable prices, promote cost certainty, and encourage the ease of fixed-price re-contracting.