Tuesday, 30 July 2019

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.


Lola said...

I am generally not in favour of any price control. But I can - just about - see the argument for price caps on utilities.

There are two problems with this. One. price caps tend to reduce choice, and two the bureaucrats who administer the price caps will get ever more ambitious in seeking power and control for themselves. It's this latter point that concerns me most.