You may save by switching, but who has the time?

The late Screaming Lord Sutch was a British entertainer who ran in many by-elections to gain publicity. One of his most memorable slogans was "Why is their only one Monopolies Commission?" The Central Bank's recent report on insurance pricing brought Sutch's perceptive slogan to mind.

It has now become common practice to sell services such as insurance, mortgages, electricity, gas, and phone services at a lower price to new customers than to existing customers. This raises a serious question for public policy – is this damaging to consumer interests, requiring regulation by the State?

In 2016 the British competition authority, the CMA, considered whether the action by energy companies, charging new customers much less than existing ones, was appropriate. A majority of the CMA found that it was acceptable because all consumers had the option to choose a lower price, even though they knew many vulnerable poorer or older customers would not move company, suffering much higher energy costs. The CMA also allowed the British energy companies to offer a multiplicity of different tariffs, although this flooded consumers interested in changing supplier with so much information that they could not identify their best option.

Older customers

ESRI research has shown that once consumers have to take into account more than two or three factors at the same time, they struggle to spot good deals and often make mistakes. Thus, making choice complex effectively stops many consumers from taking the right option on switching supplier. Researchers also found that older customers are characterised by inertia, and fear of making a mistake in changing their provider.

Loyal customers pay considerably more for insurance than switchers

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Cork credit union set to impose charge on savings

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Why are banks starting to charge us for saving money?

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Credit union tells members to cut savings to just €15,000

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When the Irish electricity market was opened up to competition, the ESRI recommended that the regulator should continue to regulate the incumbent supplier, the ESB, but that advice wasn't taken. While it would have been preferable for the regulator to have kept a watching brief on the ESB, in this particular instance, the ESB, as a State company, did not maximise its profits by charging its large pool of slow-to-switch subscribers a premium price to take advantage of their inertia.

Up to now, the Irish regulatory bodies have encouraged consumers to move supplier as the antidote to differential prices charged to stayers and movers. A recent Central Bank study has shown that over half of the mortgage holders that they studied could save more than €1,000 within a year if they switched – but the reality is that most customers don't take the trouble to move.

Any assumption that you get competition in utilities or telecoms through most customers being willing to switch supplier flies in the face of very extensive evidence that consumers in many of these markets lack the time, the information and sometimes the courage to switch. Research into how consumers really behave is now recognised as being a very important guide for public policy. It can show how the current exploitation of consumer inertia by large companies can best be tackled. However, the answers may not always be straightforward.

An important argument against banning all such differential pricing is that it could militate against new products. For example, with the rollout of smart meters in the electricity market, companies will be able to offer customers the option of paying different prices depending on the time of day or on whether the wind is blowing when they use electricity. This could open the door to significant cost savings for customers, and significant savings in carbon emissions. Thus, to outlaw or restrict variable pricing could, in that case, be damaging to the public interest.

Discretion

As there is no single "right" answer to how the pricing behaviour of key service providers should be regulated, it is appropriate to provide discretion to a regulator to assess all the issues. Regulators are often precluded from considering changes in market structure, and because the same concerns arise in different kinds of utilities and services, from electricity to telecoms, it may be better for the Competition Authority to take the lead on this issue. They may need new legislation. Their remit should be the wider public interest, taking account of how real consumers actually behave.

A final monopoly supplier that I have not considered, is Santa Claus. He or she provides the same service worldwide, which immediately poses a problem as to who should regulate this monopoly. Domestically, the Central Bank might relish the job of overseeing a generally successful service provider with an appropriate corporate culture. However, if public policy were best served by breaking up this monopoly, the role should fall to the Competition Authority.