The Road to Confusopoly

1
The Road to Confusopoly

• Professor Joshua Gans
• University of Melbourne

2
Confusopoly

• Scott Adams a group of companies with similar
  products who intentionally confuse customers
  instead of competing on price.
• Examples telecommunications, insurance,
  mortgages, credit cards, etc.
• But what about energy retailing?

3
Search Model

• Consider an industry with several producers of an
  homogenous product
• A consumer considering switching suppliers will
  switch if
• Pold D gt Pnew
• where D are switching costs including any
  disconnection fees
• A consumer will only search for a new supplier
  if
• ProbPold D gt Pnew gt S
• where S are search costs

4
Diamond Paradox

• With many suppliers, why would you expect to get
  a better deal?
• If all highly competitive, then cant do better
• Only if you think firms will offer you a customer
  specific deal but will they?
• According to Diamond (1971) each firm wont lose
  many customers by charging a slightly higher
  price than other firms
• In equilibrium all charge the monopoly price and
  no search occurs.

5
Sleepy Incumbent Model

• Customers may expect to get a better deal if
  switching from an incumbent
• Implication entrants should advertise pricing
  deals
• Incumbent may accommodate this by charging higher
  prices (Guilietti, Waddams-Price, Waterson, 2005)
• Should see incumbent retailers charge a higher
  price than entrants in an area

6
Which Model? Sample of One

• Which model applies in Victoria? Diamond Paradox
  or Sleepy Incumbent
• With this in mind, I decided to revisit my own
  gas retailing choice in Victoria
• I was aware I had choices
• I had never researched options before
• I utilised the Essential Services Commission
  Energy Comparator

7
Sample of One which is cheaper?
8
GST and Time Adjust
9
Compare with Cap
10
Total Saving 22.64 S 3 hours
11
Periodicity

• TRU Energy and Origin not equivalent
• One month versus two months
• Example April-May
• Suppose my demand is 4000 (April), 8000 (May)
• TRU Energy pay total of 127.19
• Origin Energy pay total of 128.20
• Origin potentially has a weaker price cap than
  TRU energy

12
Victorian Gas Demand
Areas of Bimonthly Variation
13
Summary

• Difficult to compare price offers
• Prices are the same but shorter period yields a
  lower overall bill need information on month by
  month demand to work this out.
• Prices still at the cap
• Whether asking to switch or a new connection
• 2 discount available if ask
• Diamond Paradox (rather than Sleepy Incumbent
  model) alive and well in Victoria
• Would we have been better off keeping a single
  incumbent and inviting entry (as per telcos)?

14
Behavioural Economics

• New economic approaches for dealing with consumer
  irrationality
• Basic idea
• When faced with an upfront cost and future
  options, consumers with over-weight option value
  and spend too much upfront
• When faced with an upfront benefits and future
  avoidable costs, consumers will under-weight
  ability avoid costs and spend too little upfront

15
Implications for Switching

• Consumers will under-weight importance of
  disconnection fees
• Consumers will under-weight ability to opt out of
  automated payments to switch in the future
• Consumers will under-weight future switching
  costs
• Consumers will fail to invest in information to
  make choices transparent
• And firms will not have an incentive to provide
  transparency as consumers will demand more
  upfront to compensate for switching costs later
  on.

16
Policy Responses?

• Likelihood of consumer choice providing a locus
  for effective competition is bleak
• Energy retailing looks like a confusopoly
• Would a regulated pricing structure that forced
  simplicity and transparency be better?
• Would a consumer choice regime that required a
  choice be effective?
• E.g., an audit of individual choices or an annual
  auction for customers?