How do economic agents behave

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How do economic agents behave?

• Results from behavioural economics

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The issue

• Today, you are asked to give a talk to potential
  MBA students on the 18th July and happily
  accepts.
• On the 11th July, you wish you could defer giving
  the talk even though nothing has changed.
• This lack of self control is common.

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its even worse

• Today, you do not anticipate that you will
  regret, in July, your decision to give the talk.
• This is a common failure to anticipate your
  future position it is a naïve approach.

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The point
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Outline

• Implications of time inconsistency
• Confusopoly
• Maybe people are really rational?

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From this weeks The Onion
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Supplying what they demand

• If consumers lack self-control but are otherwise
  sophisticated, firms will offer products to help
  them commit
• E.g., low unit price for gym visits
• If consumers lack self-control but are naïve,
  firms will exploit this
• E.g., extract payments for automatic renewal fees

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Two-part Tariffs

• Should set unit price equal to marginal cost and
  use upfront fees to extract surplus
• If time inconsistent and know it
• Want to commit to later use so want a lower unit
  price and higher upfront fee
• If time inconsistent and dont know it
• Over-value lower unit prices and so are willing
  to pay more upfront
• Implications
• Gym membership prices are consistent with this
• If want to deter smoking force people to buy
  licenses to smoke rather than just raise the cost
  per packet

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Themes

• Demand in a market is based on actual consumer
  behaviour.
• For time-based consumption, naïve consumers will
  place too little weight on future costs and
  anticipate getting more value than they actually
  receive
• Consumers will purchase today more than they
  would if they anticipated their wants in a
  sophisticated manner
• Over-consumption for any given price
• Competition works to ensure consumers are
  supplied with what they demand at a lower price
  not with what they want.

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Bundling and add-on pricing

• Buy one product (hotel, groceries) and then buy
  another (phone calls, petrol)
• Consumer reaction
• Sophisticated consumers anticipate add-on prices
  and substitute away (benefit of lower price for
  initial good)
• Naïve consumers do not anticipate prices and
  over-consume
• Firms price first good low and naives
  cross-subsidise sophisticates
• Suspicious of bundling without any efficiency or
  value rationale.

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Education

• Under monopoly,
• May have incentive to educate naives if dont
  want to price discriminate against them
• Under competition,
• If educate a naïve, then they learn to substitute
  away go to another firm and receive cross
  subsidy
• No incentive for a firm to educate
• Education is a public good

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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?

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Energy Retailing? Sample of One

• Is energy retailing a confusopoly?
• 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

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Sample of One which is cheaper?
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GST and Time Adjust
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Compare with Cap
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Total Saving 22.64 S 3 hours
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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

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Victorian Gas Demand
Areas of Bimonthly Variation
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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
• What about telecommunications?

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Plans (calls to landlines)
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Assumptions

• Calls modelled are long distance within
  Australia, and to mobiles within Australia
• Distributions of call durations as below, with
  means of 5 and 10 minutes respectively
• Ownership of a mobile on a base plan (the lowest
  cost) is assumed for each mobile network
• Calls switched to mobiles have the same
  distribution as the distribution they were drawn
  from. That is, consumers do not only switch
  calls of a particular duration from fixed to
  mobiles - this is a future line of analysis
• 50 of calls are in the peak period
• 70 of calls are to fixed lines, 30 to mobiles.
  The phone of choice is independent of whether the
  call is made in peak period or not this
  assumption can easily be relaxed with appropriate
  data and
• 45 of calls to mobiles are to Telstra mobiles
  (reflecting Telstras share of the mobile market).

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Call Patterns (5 min average)
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Switching from Telstra Complete to Mobile
Hutchison
Vodafone
Optus
5 min average
Nera analysis
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Switching from Telstra Plus 1.49 to Mobile
Hutchison
Vodafone
Optus
5 min average
Nera analysis
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Switching from Telstra Complete to Mobile
Hutchison
Vodafone
Optus
10 min average
Nera analysis
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Switching from Telstra Plus 1.49 to Mobile
Hutchison
Vodafone
Optus
10 min average
Nera analysis
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Summary

• Difficult to compare price offers
• Depends on a consumers specific calling pattern.
• Networks differentiate on call duration
• Mobiles are a potential substitute for fixed line
  calls
• Imperfect analysis but substantial savings
  possible
• Despite competition regulated Telstra prices
  still important.

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Reform Option?

• Portuguese Competition Authority analysis
• Conclusion
• Wide number of mobile plans difficult for
  consumer to assess
• This impeded price competition
• Reform
• Require all networks (and agents) to provide a
  web-based program to allow consumers to identify
  the cheapest plan
• Supply information to allow regulator to host a
  program to allow consumers to compare competing
  plans between mobile networks.