Designing Effective Remedies

Competition and consumer protection authorities generally want to do the minimum necessary to correct whatever problem they encounter. Companies, too, would generally prefer to offer to change their behaviour (such as by limiting price rises) rather than have their merger plans blocked, or be forced to sell off part of their business so as to reduce market power. Pretty much every competition investigation therefore ends up with a lively debate about the most appropriate 'remedies' - unless it is a 'clearance' of course.

One problem with behavioural remedies - such as telling customers (through notices on tills or bills) to take care because they might be about to be ripped off - is that it is very hard to design remedies which are effective. This is often because humans take decisions for all sorts of complex reasons, which are not easily understood, let alone easily modelled by economists. And it is sometimes because the mere provision of more information seldom helps - and might hinder - the resolution of an underlying information problem, such as an inability to grasp the meaning of an interest rate, or a difficulty in resolving a complex problem such as what medicine is likely to be most effective , or what phone or electricity tariff offers best value for money. Or sometimes the problem is simply that the information (for instance a leaflet warning notice on a till) can be crowded out by the sales patter of an assertive salesperson.

Interesting research projects in this area include the joint Better Regulation Executive/National Consumer Council project which led to their 2007 report Warning: Too Much Information Can Harm and a 2016 review of the effectiveness of demand side remedies by UEA's Centre for Competition Policy.  This latter research led to Which? making a number of recommendations in a paper published at the same time.  Here is an extract from the Executive Summary:-

We have identified the following core findings:

  • Supplying more information to consumers can help to tackle consumer detriment, but in many cases it is not enough
  • It is hard to increase consumer switching behaviour unless a remedy removes a clear contractual restriction. In particular we have found it is hard to increase how much consumers search for better deals simply through providing more information
  • Remedies sometimes fail because of the way they are implemented by market participants
  • Remedies can make things worse for a variety of reasons. For example:
    • Counter-intuitively some types of remedies may worsen consumer decision making; for example consumers may trust their current provider more if the current provider is forced to provide information about alternative options
    • Previously engaged and savvy consumers may lose out from the implementation of remedies which limit what suppliers can do
    • Poorly-designed remedies can provide the consumer with too much information or too many options
    • The design of remedies using behavioural insights has improved notably over the last decade, although a successful remedy also needs to account for supplier reaction
    • There may be limits to what can realistically be achieved in markets through demand- side remedies, especially when one considers reactions of both firms and consumers to such remedies and the risk of unintended negative consequences.

We [accordingly] argue that regulators and competition authorities should:

  • Treat testing and evaluation more seriously, and not use cost or difficulty as an excuse to not carry this out. ... We want to see regulators starting to think about remedies earlier in the inquiry process, devoting adequate time and effort to design and testing of remedies, including engaging with consumers themselves to test effectiveness. The largest cost to consumers is ineffective remedies, not testing and evaluation.
  • Establish clear outcome measures of a successful intervention, so that they can monitor and evaluate the success of the remedies, and adjust their regulatory approach based on consumer outcomes.
  • Ensure that they explicitly plan reviews of remedies, and commit to carry out evaluations, in particular when testing before introduction is impossible.
  • Use a wide range of techniques to identify more innovative remedies, avoiding remedies which sound good in a committee room but don’t improve consumer outcomes. This could include opening up the process of finding solutions to allow private actors and independent intermediaries to design solutions.
  • Ensure that supply-side remedies based on competition policy are not prematurely ruled-out.
  • Recognise the limits of demand-side remedies that seek to change consumer behaviour and be prepared to say that either direct consumer protection is needed, or that nothing can be done that would improve the situation.

Another problem is that information remedies add to suppliers' costs, and so tend to increase prices. The annual cost of meeting the CC's informational remedies in connection with the sale of extended warranties was estimated to be around £1m pa.

See also my note on behavioural economics, and my merger control web page for a discussion of the need, if possible, to avoid behavioural remedies in merger cases. The latter page also includes some advice on how to design good behavioural remedies if you are forced to use them.

 

Martin Stanley

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