UKCN consumer remedies project: knowledge bank Sources of demand-side problems: information asymmetries, search costs, barriers to switching and behavioural biases The content is divided into ‘core reading’ and ‘further reading’ lists. Core reading captures fundamental and/or important documents of use primarily to inexperienced users while further reading lists capture more specific material intended for experienced practitioners. Contents Page Overview of demand-side problems ................................................................................................................................................................. 2 Core reading ................................................................................................................................................................................................. 2 Further reading .............................................................................................................................................................................................. 3 Informational market failures, search and switching costs ................................................................................................................................ 5 Core reading ................................................................................................................................................................................................. 5 Further reading – informational asymmetry ................................................................................................................................................... 7 Further reading – search costs ...................................................................................................................................................................... 8 Further reading – switching costs .................................................................................................................................................................. 9 Behavioural economics .................................................................................................................................................................................. 11 Core reading ............................................................................................................................................................................................... 11 Further reading – behavioural biases .......................................................................................................................................................... 13 1 Further reading – behavioural industrial organisation ................................................................................................................................. 16 Further reading – application to vulnerable consumer groups..................................................................................................................... 18 Further reading – pricing practices .............................................................................................................................................................. 19 Choices of remedies and types of demand-side interventions ....................................................................................................................... 21 Core reading ............................................................................................................................................................................................... 21 Further reading – ‘paternalist’ remedies: benefits and risks of intervening on consumers’ behalf .............................................................. 24 Further reading – ‘nudges’ .......................................................................................................................................................................... 26 Further reading – providing information to customers ................................................................................................................................. 30 Further reading – shopping around and digital comparison tools ................................................................................................................ 38 Further reading – measures to promote switching ...................................................................................................................................... 40 Overview of demand-side problems Core reading Document Topics covered Notes CC, (2013), Guidelines for market Weak Consumer Part 3 of this guidance addresses the three key analytical investigations: Their role, procedures, Response, Features issues the CMA looks at in market investigations: assessment and remedies (Part 3: ‘weak Harming Competition, customer response’) Competitive Markets, — the characteristics of the market and the outcomes of Market Characteristics. competition within it; — the definition of the market; and 2 Document Topics covered Notes — the state of competition in the market; and whether there are any features harming competition. Paras 295-318 of this guidance set out the factors the CMA will consider in relation to ‘weak customer response. This includes difficulties customers may face in accessing information, identifying best value offers and switching suppliers. FCA, (2016), Economics for Effective Issue Diagnosis, The paper presents a market-based approach to the design Regulation Intervention Design, of regulation. It produces a combined assessment of all the Impact Assessment main problems facing regulators who want to make markets work well: information asymmetries, externalities, market power, and behavioural distortions, as well as the effects of previous intervention. Further reading Document Topics covered Notes UKRN (2015): Consumer engagement and Barriers To Consumer Report analyses past and ongoing work on consumer switching Engagement, engagement and switching already undertaken by Switching, Behavioural participating regulators. It also identifies and groups 12 key Remedies. 3 Document Topics covered Notes barriers that make it difficult for consumers to engage, assess and/or act. Europe Economics (2007). An analysis of the Consumer Detriment, The purpose of this paper is to review theoretical and issue of consumer detriment and the most Markets, Consumer empirical literature which shed light on the following: appropriate methodologies to estimate it – Welfare, Consumer report for DG SANCO (Parts 1 and 2) Dissatisfaction. • How consumer detriment can arise and the factors that may affect its magnitude; Handbook to Assess consumer detriment • How consumer detriment might be measured; • How markets could be monitored for the possible presence of consumer detriment. Luke Garrod, Morten Hviid, Graham Loomes Consumer Remedies, This paper summarise the existing economic theory and and Catherine Waddams, CCP (2008) Market Investigations, empirical evidence underlying a number of remedies in Assessing the effectiveness of potential Behavioural Remedies, consumer markets. remedies in consumer markets – OFT994 (in Economic Theory, particular, section 3) Bounded Rationality, Section 3 of this paper provides a discussion of why Search Costs, consumers may be inactive in a market. Specifically, there is Switching Costs. a brief review of the impact on consumer behaviour and competition of: • search costs • switching costs, and 4 Document Topics covered Notes • bounded rationality and non-standard preferences. In addition, there is discussion of what makes a successful remedy. Stefano Della Vigna (2009): Psychology and Consumer Preferences, The paper looks at research in Psychology and Economics, Economics: Evidence from the field Consumer Behaviour, and specifically: Empirical Analysis, Decision Making. (1) nonstandard preferences, (2) nonstandard beliefs, and (3) nonstandard decision making. The paper surveys the empirical evidence from the field on these three classes of deviations. Informational market failures, search and switching costs Core reading Document Topics covered Notes OFT655, (2003), Switching Costs Switching Costs, The paper looks at different types of switching costs and Search Costs, provides an overview of the economics of switching costs Annex A, Literature review Imperfect Information, and how they can affect competition, including a review of 5 Document Topics covered Notes Annex B, Empirical methods Effect On Competition, literature on switching costs. It also discusses the Intervention Design, implications for competition policy and interventions and Annex C, Case studies Empirical Analysis, provides a practical guidance for the assessment of the Literature Review effect of switching costs (including annexes focusing on empirical methods and case studies). Search costs are discussed in detail in Chapters 2 – 4 and Annex A Information market failures are discussed in detail in Chapter 4 – The economics of switching costs and Annex A OFT, (1997), Consumer Detriment under Imperfect Information, The paper looks at the markets with imperfect information Conditions of Imperfect Information Search Costs, and search costs, examines how consumers make choices in Intervention Design such markets and how this may effect competition and consumer welfare. The paper develops a framework which helps to identify markets where consumer detriment is likely to be a problem and devise appropriate remedies. 6 Further reading – informational asymmetry