How to kick-start stalled markets

18 January 2012 - John Springford

John Springford considers why energy, bank and broadband consumers are so reluctant to change service providers when better value offers are available, and offers a potential solution to consumer apathy. Read on and cast your vote.

What do banks, energy, broadband and football clubs have in common? A reputation for treating customers badly. But why? And what can be done about it?

In all four markets, people stick with the same provider for years – sometimes their entire lives. People do not check the market to see whether they could get better quality or a cheaper price elsewhere. So the market breaks down, and providers build a monopolistic base of consumers and extract large profits from them.

Banks, for example, scramble to attract young people to take out current accounts – paying them to do so or offering below-price credit. They bet, correctly, that most people won’t switch to other providers. They then make money from interest on positive balances when their customers get richer, on overdraft charges if they get poorer, or from selling them credit cards and insurance as they get older. Energy companies know that people are slow to switch providers when prices go up. Broadband companies and football clubs may offer you a good deal but fail to deliver in the future: broadband speeds may get slower in your area, or you might have picked Burnley in their 1960s heyday, only to find they soon crashed out of the top flight.

Why then do regulators fret so much about the financial, energy and broadband markets, but not about football?

In the first three markets, people could objectively get better value elsewhere, but they don’t bother to change provider. Even though switching is a simple operation, it’s boring or fear-inducing (facing up to your overdraft is never easy) and you can do it tomorrow. Procrastination rules. The market fails.

Providers can take advantage of this. Financial, energy and broadband markets suffer from what economists call ‘information asymmetries’ – the consumer finds it hard to assess the quality of the service upon contracting with the provider. So providers offer attractive deals to get you through the door, only to pick your pocket later. Banks offer high ISA ‘teaser’ rates, and then the interest rate falls after a year because they know you probably won’t switch. Energy companies know they can stick prices up without a corresponding loss of market share. Broadband companies advertise average download speeds which may be far slower in your area.

On the other hand, consumers appear to be willingly abused by football teams (at least from the perspective of people who hate football), despite there being no ongoing contract tying them in. Consumers take pride in being non-switchers, while in other markets no one can be bothered to switch. This pride is not necessarily rational. Why wouldn’t you switch from an £1,800 season ticket at the Emirates to a £1,200 ticket at Spurs, now that Spurs are currently ten points ahead and are playing better football? It’s down to emotion – you’d betray the tribe. Supporting the provider is as important to the consumer as the quality of the service they deliver.

Ofcom has just banned roll-over broadband contracts so people can switch without notice once their contract’s up. Perhaps we should extend this principle, and have fixed term contracts, just like the market for season tickets. The service would have to stop after a year, and consumers would have to actively choose a provider – either the same one, or a competitor. This would get competitive forces going. Regulators could then put their feet up and turn on Match of the Day, knowing markets were ticking along nicely.

Cast your vote

Would you be likely to pick a new bank if John's idea for fixed term contracts was introduced?

Please add a comment

Posted by jeff on Jan 20th, 2012

Good proposal John. Anything that increases the transparency of consumer information must help to improve the functioning of these markets. Link that to mechanisms that counter our natural tendencies to procrastinate and push us to make active decision, and it seems like you have a winning combination.

Another issue you might want to focus on is so-called 'drip pricing'. That's where the initial price seems attractively low, but by the time you have paid for the bus from the terminal to the plane, the toll to use the steps up to get into the plane, and the one-off payment for the air you will breathe during the course of the flight, the final cost is much higher.

On a related point, I think you might be a little too complacent about how well football is operating as a market, but that's for another post...