Confusing two separate issues and tbus drawing the wrong conclusion

It is generally accepted (whether entirely true or not) that

a. Energy, mobile phone, broad band and insurance companies offer new customers discounts and overcharge continuing customers. Some people waste hours every year switching to a different company; and the companies then have the added hassle of closing old and opening new accounts. This is not proper price competition and does not make the companies/the economy more efficient, it just wastes a load of time.

b. Energy companies in particular enjoy a monopoly-cartel position and overcharge generally.

Problem a. is solved by banning new customer discounts i.e. expecting companies to offer the same price to new and continuing customers. This seems fair enough to me. Whichever companies have the most competitive price/service will gain market share naturally, as it should be.

Problem b. is easily fixed with a price cap. It's not difficult to set the price of electricity, gas or water so that providers still make a reasonable return, and the original privatisation was done on this basis. The most efficient companies will still be the most profitable. I don't see how this applies to mobile phones, broadband or insurance, that is proper competition IMHO.

Sam Bowman went off on a tangent in yesterday's City AM:

Even if you’re a savvy customer who remembers to switch insurance and energy providers every year, and cancel your mobile phone contract once you’ve paid off the handset, it’s a near-certainty that you have relatives and friends who aren’t. To many people, it’s too much of a hassle to switch, and the gains are too uncertain to bother checking.

This practice seems like a rip-off, and that was the motivation behind the energy price cap proposed by Ed Miliband and implemented by the May government at the start of this year.

No, that's confusing issues a. and b, which is where he goes wrong.

As critics of the policy predicted, the energy price cap is now being ratcheted downwards, so that more and more customers will be caught in it and the price discounts that energy companies can offer will become smaller and smaller. In telecoms, Ofcom has just reached an agreement with most of the mobile operators to curb loyalty penalty pricing in mobile phone contracts.

This may sound like a good thing, but trouble with price caps and contract regulations is that customer switching is good for efficiency overall. Customer switching forces companies to compete with each other and try to find ways of doing business more cheaply. Diminishing the rewards for switching means that fewer people will be willing to shop around, which weakens the incentive these companies have to improve.

Even if domestic electricity prices were fixed at a uniform price, companies would still have every incentive to generate electricity/supply gas as cheaply and efficiently as possible.

'Contract regulations' just means no new customer discounts/loyalty penalty. This reduces the amount of entirely artificial and unnecessary switching, but there would still be the incentive to switch to a cheaper/better provider. The overall competitive pressure would focus on price/service and not on pricing/marketing gimmicks.

The current regulatory approach tries to protect non-switchers by hurting switchers. That’s a dead end, making markets affected by it sclerotic, uncompetitive, and less innovative in the long run.

Neither policy a. nor policy b. 'hurts switchers'. They are entirely neutral.

A better approach may be to make switching easier, or even entirely automatic.

Agreed, but that is complementary to policy a. If companies aren't allowed to penalise existing customers with a 'loyalty penalty', they can't be allowed to penalise them with a 'leaving penalty' (to cancel out the other company's new customer discount). Gym's stay in business with savage leaving penalties, and that is not a healthy business model.

Do private schools increase competition?

Somebody at a political discussion meeting made a throwaway remark that he thought grammar schools/private schools were A Good Thing because they "increase competition".

Ho hum. At the school level, of course they do. There is no doubt in my mind that children who attend private schools get better academic results than if they'd attended state schools, which is hardly surprising, but I'm not sure that's relevant. Let's assume that state schools see themselves as competing with private schools, so maybe at the margin, they up their game slightly, again, A Good Thing.

But the point of secondary education is to equip children for a life of work and/or give them the best chance of getting a university place, which in turn is to help children end up in the best possible job. Education (beyond a certain basic level) is not really an end in itself - consider a family with children who are planning to move abroad in a few years, there is no point in the taxpayer paying for the children's education as they will not see any benefit.

Beyond a certain level, this is just an arms race. If every child were 10% better educated, then that would just mean that most of them end up in jobs for which they are 10% over-qualified i.e. from the point of view of an individual child, you want the best education you can get, taking society as a whole it would be a waste of resources.

"Competition" can mean different things:

i. If Producer A does his best to supply goods and services which are better/cheaper/whatever than Producer B, that is good for the economy, because Producer B then has to play catch up and overall standards increase. That's a clear win. Key to this is that consumers (or potential employees) have full knowledge about the goods and services (or working conditions) and can make fair comparisons (which they clearly don't).

ii. If Producers A and B have innovated and improved as much as they can, they "compete" by spending more money on advertising (providing misinformation or irrelevant facts) and trying to lock each other out by fair means or foul. That is a waste of resources and a loss.

iii. There are some competitions that are just competitions for the sake of competition, like athletics. How does society benefit if an Olympic runner sets a new world record a couple of milliseconds quicker or a few inches higher/further? Answer: not at all, at best it has a short-lived entertainment value. This is a humungous waste of resources. Compare this with films or music - that is also pure entertainment value, but people can enjoy the same films or songs for decades after they were released. Who sits down and re-watches the Olympics of a few years ago, or a horse race that was on last week? I guess nobody.

To return to the theme of private schools, you can give your child an advantage in later life by sending them there. Does that increase 'competition' in the positive sense mentioned at i. above? No, it just means that some other child is at a slight relative disadvantage for no particular reason, which is like the bad competition at ii.

To tie this in with iii., if real life were a closed system liked athletics, private school children have a one second advantage when qualifying for the Olympic running team, so they are more likely to get in. Does that mean the Olympic running team will be any better when it gets to the Olympics? Probably not, it just means that the private school kids starting training earlier, they still have a couple of years further training before the Olympics, by which time the state school kids with a one-second handicap would have caught up anyway.

Here endeth today's rant.

I'm not sure what the answer is, but it is not as simple as people think. Going to the other extreme and banning private schools might just make things worse, as there'd be nothing for state schools to compete with, so standards might slip for everybody.

Maybe the least bad system is bottom-up privatisation of state education i.e. giving parents 'education vouchers' and letting them choose which school to 'spend' them at? But if parents can 'spend' the vouchers at private schools and pay top up fees, that just compounds the original problem, so it's not as simple as that either.

The Cost of Bureaucracy

There was an interesting comment by DBC Reed about bureaucracy and competition in an earlier post, that has triggered a memory of post that I intended to write:-

I know I have rehearsed King Gillette's argument that competition increases bureaucracy before and you have acknowledged the validity of some of it,but there are newer contributors on here who appear to be enemies of the Post War British state founded on a mixed economy so some continued resistance is in order.

I'm not disagreeing with DBC Reed here, but I've long wondered how much the cost of bureaucracy affected things like competition.

Let's imagine you're working as a GP in the 1930s. You've got a patient with an ingrowing toenail. How efficient would it be to have competing hospitals providing ingrowing toenail surgery? That GP would have to send each hospital a letter, written by hand, posted, wait for a response of a few days. Someone at that hospital would have to check the appointment book, see when they could fit someone in for an ingrowing toenail operation, write back and once the GP got all the quotes a few days later, he would then write to the particular hospital and book them in. The GP then has to send a letter to the patient.

That's not only slow, it also has lots of cost in people's time writing things to and fro.

Here's how you can do it today: A GP taps a request into a comparison system. It sends a message across the internet to the servers of each hospital, that check an online appointment book, find available slots, and report back a price and availability time in about 5 seconds. The GP then selects it, at which point the system books the slot at the hospital and sends an email to the patient.

The model for today costs a lot to set up, but once set up, the transaction costs are minuscule.

What I'm wondering is whether in the past, we suited more of a state-run model, with large, centralised organisations, because while competition would have lowered prices, the cost of the bureaucracy to run it would have been so huge as to wipe out the gains, but having dramatically lowered the cost of bureaucracy, we now suit more of a fragmented model.