Presentation on theme: "Assessing the Effectiveness of Potential Remedies in Consumer Markets Draws on work and report for the Office of Fair Trading prepared by Luke Garrod,"— Presentation transcript:
Assessing the Effectiveness of Potential Remedies in Consumer Markets Draws on work and report for the Office of Fair Trading prepared by Luke Garrod, Morten Hviid, Graham Loomes and Catherine Waddams Price, on the subject of Intervening in Markets When Consumer Rationality is Bounded When consumers are inactive in a market they may not receive the full benefits from competition Can certain interventions make consumers more active – i.e. search more and/or switch more? And will this make them better off?
REASONS FOR CONSUMER INACTIVITY SEARCH COSTS A consumer may find it costly to gather / process price and non-price information SWITCHING COSTS A consumer may experience costs if they change supplier Both may apply in a world with standard rational consumers But are there additional issues raised if consumers exhibit BOUNDED RATIONALITY / NON-STANDARD PREFERENCES?
BOUNDED RATIONALITY / NON-STANDARD PREFERENCES WHAT ARE THEY? MIGHT THEY REALLY BE THE SAME THING? 1. Time / attention is a scarce resource 2. Limited capacity to recall / anticipate / put in consistent context 3. Imprecision / uncertainty about own preferences 4. Are (seemingly systematic) weighting / risk / time judgments (anomalies) simply reflections of this?
POSSIBLE IMPLICATIONS of BR / NSP for INTERVENTIONS AND REMEDIES? 1. May be some irreducible minimum degree of imprecision / inattention – everyone will be a tourist in some markets So, hard to evaluate extent of consumer benefit from intervention (to compare with its cost) 2. May want to respect genuine non-standard preferences: if consumers are prepared to pay to reduce regret / disappointment, is there anything wrong with that? 3. BR / NSP may limit effectiveness – may even entail potential for perverse effects
PRACTICAL PROBLEMS & POTENTIAL PERVERSITIES 1: SEARCH Better information: more isnt necessarily better – with limited time/attention, may add noise Obfuscation may be designed to increase tourism – ideal remedy is to clarify & simplify But this requires judgments: Which features to focus on? How to summarise them? Can consumers make the trade-offs? Might it limit choice / degrade certain qualities?
ARE PRICE COMPARISON SITES THE MARKET SOLUTION TO MORE EFFECTIVE SEARCH? Provide lists of similar products and their prices Lower search costs (once consumers have accessed them) Do they lower prices? Affect price dispersion? Change quality? Increase/reduce variety? Some evidence that prices fall – but dispersion may remain, even for very similar goods (private sites need this) Focus on price may degrade quality when difficult to observe Spurious variety may complicate / obfuscate Consumers dont search much within site, nor across sites Not comprehensive; not impartial; not trusted; limited use
PRACTICAL PROBLEMS & POTENTIAL PERVERSITIES 2a: UNHITCHING / SWITCHING Rational consumers are cool and circumspect judges, anticipating utility in an appropriately balanced way But hot at PoP, exposed to sales techniques, pay limited attention to some implications/add-ons, dont anticipate adaptation to normal use Free trials and cooling-off periods may be intended to allow experience and reflection before transaction finalised But if consumers fail to anticipate hassle costs and procrastination, may be lulled into false sense of security (Is this a more general problem of regulation and nanny state?)
PRACTICAL PROBLEMS & POTENTIAL PERVERSITIES 2b: UNHITCHING / SWITCHING Actual (whether natural or contrived) switching costs plus inertia and procrastination may facilitate capture Could intervene to prohibit contrived costs But where is the line between natural and contrived? If the default is that insurance by existing provider is automatically renewed, is this more/less natural/desirable than automatically allowing it to lapse? Default effects appear to be a law of nature … the question is simply who uses them to what ends
If consumers could be doing better, why not more personal shopper (professional native) services? Usual principal/agent and independence problems Plus hard to measure value of service (especially when non- monetary dimensions are involved) and arrange payment Plus the prospect that agents who are TOO successful put themselves out of business (price comparison sites) Plus best information owned by firms: selective release in a free market and may be costly to collect freely Some (many?) things might increase competition and improve consumer welfare but unlikely/inefficient via market... IS THERE A FREE MARKET SOLUTION? OR WILL SOME INTERVENTION HELP?
Set the default for trial offers and subscription renewals: normally, consumers must positively sign up / renew; But perhaps some exceptions – car / house insurance renewal – but require easy comparability information: last years premium, % change, industry average (requires register) Product comparison sites: not-for-profit, compulsory for traders above some size, required fields product info, privacy guarantees for consumers, free (video) guidelines about decision making, panel ratings SOME ILLUSTRATIVE INTERVENTIONS (1)
On-bill info about other suppliers prices – especially for homogeneous goods (gas, electricity, phone calls); plus direct assistance with switching Registers of providers of services above some value (builders, solicitors, estate agents, accountants, etc.) with feedback ratings Competitions for ideas for further interventions, with (contestable, published) analysis of impact – and reward SOME ILLUSTRATIVE INTERVENTIONS (2)
Thanks again to Luke, Morten and Catherine Errors, omissions and idiocies can be corrected in discussion and in this strand of future work at CCP Intervening in Markets When Consumer Rationality is Bounded