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www.ccp.uea.ac.uk
Consumers’ ability to choose in newly liberalised markets : some empirical
evidence
Catherine WaddamsESRC Centre for Competition Policy
University of East Anglia, UK
How Can Behavioural Economics Improve Policies Affecting Consumers?DG Health and Consumer Protection, Brussels, 28th November 2008
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Consumers’ ability to choose in newly liberalised markets
How far have consumers exercised their choice?Are they motivated by ‘rational’ considerations?
How well do consumers switch, based on their own estimates of expenditure (consumption)?
Do consumers know their own expenditure?
Is there enough switching?Has there been consumer overload?
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Switching in different markets, 2006
From Special Eurobarometer 260, 2007
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Survey of 2027 adults in GB, 2005, for eight utilities and financial products: not experiment, dependent on recall
Did they: Have a choice of suppliers ‘in their region’? = aware Had they searched around for better deals = searched Switched supplier in last three years =switched
usual households characteristics: age, gender, education (high income refusal)
Are consumers ‘rational’?
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Awareness, searching, switching
S w itc h e d
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p e rc e
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S w itc h e d
S e a rc h e d
A w a re
S w itc h e d
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S w itc h e d
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Ave
rage
Ele
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Mo
bile
Fix
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ne
Calls
Bro
adba
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Car
insu
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ce
Mo
rtg
age
Curr
ent acc
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Switched
Searched
Aware0
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%
Switched
Searched
Aware
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What were the expected benefits and costs?
Potential Benefit: How much is the most you think you could save per month if you shopped around?
Search cost: How much time do you think it would take you to search around to find the best deal?
Switching cost: How long do you think it would take of your own time to switch once you had all the necessary information?
Note: included any financial switching costs; all based on consumers own estimates
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average
elecmobile
fixedcalls
broadbandcar ins
mortgagecurr acc
0
5
10
15
20
25
30
35
40
£s/ month,
hours
Expected gains and costs of search/switchingin each market
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Were they rational?
Yes…. Searching and switching more likely if expected
gain was higher (weaker than using actual potential gain, indicating importance of advertising); and
less likely if expected time to switch and search was higher
Expected switching time a greater deterrent than expected search time: an extra hour of time needed to switch had three times the deterrent effect of an extra hour needed for search
………….. but
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Other factors also important
Most important: whether had switched in other (of our) markets, particularly for men and those with more education
Age: familiar U-shape: young and old more likely to switch
Education/income: increased likelihood of switching
Interpret as confidence: individuals’ variance around central estimates of gain and pain may be as important as central estimates themselves
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Do consumers who switch choose ‘well’? Evidence from the electricity
market Used consumers’ estimate of expenditure (so no
error from not knowing consumption), old and new suppliers and our own knowledge of tariffs
Calculated the change in expenditure from old to new supplier for consumers who switched only to save money
Plotted gain made against choosing the best deal for that consumer
Tested for sensitivity to changing demand, different timing of switching
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Actual Gains Made versus Maximum Gains Available
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Less than a fifth selected cheapest supplier Switchers gained less than half of maximum
available. Consistent with rational decisions and search costs
BUT At least a fifth chose a more expensive supplier,
losing an average £14-35 per year, excluding switching costs
No evidence of learning from errors (2005 no better than 2000; second switching no better than first)
Consistent with Ofgem finding (2008): 17% active; half rest will switch in response to direct marketing, often poorly
Suggests some confusion/consumer overload
How well did the switchers do?
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Who did best?
U-shaped age curve: young and old did better than middle aged
Owning own house better than rented
Experience of switching gas supplier had a detrimental effect, so no evidence of learning from related markets in terms of quality of decision
No explicit income/social class/education effect
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Consumer vs company estimates of electricity expenditure
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Comparison with supplier data
Compared consumer estimates of expenditure on gas and electricity with supplier records 1113 consumers and 12 energy companies in 2000Consumers tended to think they spent the average amount
low users overestimated expenditurehigh users underestimated
Errors bore no (other) relation with income, social grade, age, tenancy
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Has there been enough switching?
To discipline markets? Evidence from UK energy: remaining incumbent
mark-ups from old monopolists 10% (reduced to 6% during recent regulatory inquiry)
If lack of rivalry & all prices raised, switching ineffective
From consumer perspective Unknown search/switching costs make assessment
difficult Increased confidence would have same effect as
lower search/switching costs
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Evidence of consumer overload?Yes: from any underswitching
(so incumbents benefit from endowment effect); consumer errors; and direct questions.......
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Policy Implications
To increase switching:
Raise expectations of gains (supplier advertising) Lower perceptions of costs, especially switching
costs Increase consumer confidence Explore role of branding in consumer loyalty Exploit externalities across markets to increase
confidence, so work on the ‘next group’ likely to switch to leverage discipline
Explore annual reminders, format of billing information
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Policy Implications
To improve quality of switching:
Enforce existing consumer protection laws, eg to avoid mis-selling
Explore: form of information to help decision making in
practice standardisation of information (eg price per unit)BUT beware unintended consequences; use pilot
studies to identify effects of proposed remedies ex ante
Recognise benefits of fewer choices on demand side (though may reduce rivalry on supply side)