Switching & Effective Competition

Consumer bodies and regulators often bemoan the reluctance of energy and financial services customers to switch suppliers. This web page considers whether such concerns are appropriate.

Concerned commentators generally point out that active consumers, who are prepared to switch suppliers, will generally benefit from significantly lower prices and will sometimes, though not always, get better service as well. This is, in simple terms, because suppliers will compete to attract such customers and do not need to bother pleasing those customers who are unlikely to switch to a competitor.

Nobody would, of course, be much bothered by existence of inactive (lazy?) customers were they not all too often from the disadvantaged sections of our community - such as those with low incomes, poor numeracy, and/or limited access to the internet. Financial regulators, for instance, never tire of pointing out that a worryingly high proportion of the population do not understand percentages and so are incapable of judging the relative merits of financial products. And Ofgem and the CMA are very concerned about the high prices charged to those who pay for their energy via pre-payment meters. Unless great care is taken, these concerns lead to ever increasing regulation, much of it ineffective and evidenced by excessive paperwork and a plethora of tick boxes.

Sceptics, however, argue that - if many customers are paying too much for their energy, say - then middle men or new competitors will quickly move in to help them. Look at the growth of comparison websites, they say. These offer a much better solution than would yet more complex regulation. After all, none of us need a regulator to teach us that similar tomatoes can be bought at quite different prices in Waitrose and Lidl.

But this is an inaccurate analogy. Energy suppliers and financial institutions all too often offer exactly the same product at wildly different prices to different customers. They exploit their customers' ignorance or frailty in a way which verges on immorality. And it is of course much more difficult to switch energy supplier, or from one bank to another, than to walk into a different shop. The result is that 'price dispersion' (price difference) is often much much higher than could be justified by differences in the cost of supplying the product or servicing customers' needs.

Broadly speaking, therefore, the switching debate resolves itself into two issues - the need for consumer protection (click here for a further discussion of this subject) and the existence or otherwise of ...

Effective Competition

The phrase effective competition appears frequently in competition legislation, but it is devilishly hard to define - or even identify. Many experts will readily admit that they haven't the faintest idea what 'a well functioning market' looks like. Competition is, after all, a process, not an outcome. Apple's profit margin on iPhones has been estimated to be as high as 69%, but that doesn't mean that the mobile phone market lacks effective competition. And if 'inert customers', 'stickiness' or 'lack of engagement' are the problem then the market is much more likely than a regulator to find ways of engaging them.

Martin Stanley