Competition and Consumer Policy: It’s all about Consumers!

Louise Sylvan

ACCC

Consumers drive competition

Consumers exercising

informed choice

Vigorous

competition

Competitiveeconomy

Productivityeconomic gains

Innovation, price competition

Active Consumers Active Economy

Consumers drive competition

Consumers exercising

informed choice

Vigorous

competition

Competitiveeconomy

Productivityeconomic gains

Innovation, price competition

Active Consumers Active Economy

Consumers drive competition

Vigorous

competition

Competitiveeconomy

Productivityeconomic gains

Innovation, price competition

Active Consumers Active Economy

Don’t worry too much

Market Failure

Transaction costs Agency problems Informational asymmetry

Government intervention may be appropriate

Information

Don’t worry too

much

Examining actual consumer outcomes:

Empirical data

Deregulating Electricity Markets Conclusions

decision complexity rather than conventional theories of rational decision making

Better consumer pricing information was needed – too hard to compare

Reducing choice may sometimes increase benefit

Behavioural Economics

What is it?

Branch of both Economics and Psychology

Different assumptions – suspends the assumption of perfect rationality Assumptions are based on empirical evidence or

experimental evidence rather than a normative theory

Behavioural assumptions of microeconomics (conventional)

King Island Brie

Grange Hermitage

Microeconomics rests on a set of assumptions about preferences. Preferences are complete, transitive, (well-ordered) monotone and stable.

Consumer behaviour in structurally sound, competitive markets, reveals their true choice – in aggregate at least. We infer what people want from what they choose.

What if?

King Island Brie

Grange Hermitage

What if?

King Island Brie

Grange Hermitage

Preferences are discontinuous

What if?

King Island Brie

Grange Hermitage

Preferences are not stable

What if?

Q

P

Jane’s demand curve (addiction)

Demand curve Jane would like to have

Our behaviour does not reflect our preferences?

What if?

We are concerned with equity and not just self-interest?

Assumption – rational behaviour at high levels of aggregation

Rational mean

Behaviour clustered around “rational” mean

BE questions this assumption

Rational mean

Behaviour clustered around some other point -- biased

Observed behaviour

While aggregate behaviour often conforms to assumptions of rationality, there are often systematic departures from rationality, and these are not necessarily in consumers’ best interests.

And behaviour can be fickle

Rational mean

Behaviour moves in response to minor stimuli

Observed behaviour

Decision-making

In general, our decisions are made on the basis of limited search (not even bounded rationality)

We are guided by heuristics (quick rules of thumb), which generally serve us well, but which sometimes lead to costly biases – i.e. away from our “rational” self-interest.

Some heuristics and biases

EndowmentOverconfidenceFramingAvailabilityPseudocertaintyAnchoringChoice overloadMyopiaSelf-control and discounting distortionsHerding and beauty contestsShifting preferences

Few “new” findings in behavioural economics – most are known to competent salespeople and experienced finance experts.

Contribution of behavioural economics is to systematize knowledge.

Fairness

Ultimatum game

Proposer – to propose division of a resource

Acceptor – to accept or reject division

Ultimatum game

Proposer – proposes division

Acceptor – accepts or rejects

Both benefit Neither benefits

Acceptor actually bases decision on perception of fairness. Limitation of Pareto assumptions – overridden by strong social norms concerning fair dealing

Fairness

Evidence that people:

engage in acts of generosity that cannot be expected to be requited

incur costs to punish those whose behaviour they disapprove of

Self-interest overridden by strong norms of fairness. Consumers are not indifferent to conditions of supply

An intervention in a market must be seen to be fair

Actions to preserve or improve fairness may be individually costly but collectively beneficial.

Choice and Information Overload

Evidence that past a level, consumers default or choose not to choose (they choose whatever or walk away creating dead weight loss)

Behavioural eco – optimum level of choice

Range of choice

Consumer benefit Conventional economics – more choice is better

FramingOur decisions are influenced by the frame:

“This account is subject to a 3 percent penalty if not paid within 30 days” OR “Payment within 30 days will attract a 3 percent discount”

Contains 8% fat 92% fat free

OR

Taking out a loan

Varying interest rates – the lower the interest rate, the higher take up of

the loan One example vs four examples of different

loan amounts and monthly payments – one example creates more take up of loan than

four examples Smiling picture of woman, smiling picture of

man

Context (framing) Matters

Contextual signals can matter significantly For men – 4.5%

Oooh!! That smiling guy on the letter is offering me a loan!

He looks just like Johnny Depp!

Powerful New Solutions?

Powerful New Tools?Use of Behavioural Defaults

Pennsylvania Auto insurance Option of limited right to sue Lower premiums Opt-out Transaction costs = 0

75% ‘selected’ full right to sue

New Jersey Auto insurance Option of limited right to sue Lower premiums Opt-in Transaction costs = signature

20% selected full right to sue

No

Yes

No

Is the market sound?Are consumers enjoying the

benefits of a competitive market?

Decision TreeDemand-Side Market Analysis

by Consumer Protection Regulators

Is there information failure?

Informational Instruments

Are there behaviouralbiases affecting consumerdecision-making andoutcomes?

Behavioural Instruments

CHECKS

TOOLS

CO

NS

UM

ER

(De

ma

nd

sid

e)

Other Instruments

Are benefits of intervention likely to

outweigh the costs of intervening to

empower or protect Consumers?

Are costs falling on vulnerable or disadvantaged

groups?

YES

STRATEGIES for compensation

or protection

Yes

NFA

NFA = no further action

No

STRATEGIES for improving

market for consumers

Yes

Yes

Types of Interventions

For the unsophisticated consumer: defaults (using anchoring and endowment bias) limited information, but in well-designed frames debiasing (bias warnings)

For the undisciplined: cooling off periods optional binding contracts

For everyone: Clever arrangements against consumers own weaknesses –

careful design of decision contexts

The task of a joined up agency

Consumer Protection Outcomes

Com

petit

ion

Out

com

es