Reverse auction schemes – where suppliers bid for consumer’s business – would spark fresh competition in consumer markets and help those on low incomes achieve better value for money, says a new report by think tank the Social Market Foundation (SMF).
Bargaining on a low income: A better deal for consumers shows that, unlike middle and high income households, the spending patterns of those on low pay make it less likely they will extract value from consumer markets, meaning they can often pay considerably more for the same goods and services.
Drawing on exclusive new polling and interview data, conducted by Populus and ComRes, Bargaining on a low income reveals that while some low income consumers take pride in actively searching for the best deals; many preferred not to switch, citing a strong preference for relationships with suppliers based on loyalty and trust. The report finds that only 30% of households with annual incomes of £14,000 or less had switched telecoms or energy provider in the past two years, compared to 57% of households with annual incomes between £41,000-£50,000. Many low income consumers reported they felt frustrated that it was sometimes necessary to threaten to leave an existing provider before being offered a better value deal.
The SMF calls on regulators to allow reverse auction schemes in UK consumer markets – such as energy or telecommunications. This would shift responsibility onto companies to generate competition, rather than relying on consumers to shop around for the best deal, creating a mechanism to drive competition and value. The report points to a similar successful reverse auction scheme in the US energy market (the Energy Auction House), where suppliers bid online in real-time against each other to provide consumers with the best quotes for their requirements.
The report also found further evidence of poor market value for low income consumers:
- Low income respondents viewed the fees charged for landline internet as particularly bad value – only 49% of households with annual incomes below £14,000 reported these landline charges as good value, compared to 78% of households with annual incomes between £41,000-£50,000.
- Low income households were less likely to feel that running a car offered good value compared to higher income households – only 35% of households with annual incomes below £14,000 reported running a car as good value, compared to 49% of households with annual incomes between £41,000-£50,000.
- In the energy market, low income respondents felt suppliers didn’t communicate billing or pricing information clearly and that the information they did receive could, at times, be ‘misleading’.
- However, low income respondents identified public transport and grocery shopping as areas in which they felt able to extract better value for money.
Report author Ben Richards commented:
“Policymakers and regulators need to urgently review the ways in which some markets can function to the detriment of low income consumers. Reverse auction schemes in markets such as energy and telecoms is an innovative way of putting the onus onto companies – rather than consumers – to drive competition.
Consumers would benefit from products that are better value and better tailored to their needs, and standards of living would improve. Without reform in these markets, low income consumers will continue to be disadvantaged. We need to find new and original ways of helping all consumers to get a better deal.”
Bargaining on a low income makes a number of recommendations to ensure consumer markets work better for low income households:
- Increased consumer access to information:
- Provide a barcode or quick-response (QR) code with each bill consumers receive to allow them to compare prices more easily using mobile technology
- Require companies to give comparison information at the point of sale (as already happens in many supermarkets for grocery shopping)
- Encourage greater use of collective switching
- Collective switching schemes increase the bargaining power of consumers by negotiating as a group and could be implemented by housing associations, local authorities and other trusted intermediaries
- Move towards charging per unit, rather than having fixed cost tariffs
- For example, reduce or eliminate the per-day costs for gas and electricity which result in poor value for those using small quantities
- Provide better value for those budgeting in the short term
- Put pressure on companies to increase product flexibility for those budgeting weekly
-ENDS-
Podcast of the launch event:
NOTES TO EDITORS:
- Bargaining on a low income: A better deal for consumers draws on 12 in depth interviews, two focus groups, and a nationally representative telephone poll of 1,000 respondents. The interviews and focus groups were carried out with low income consumers from several areas across England by ComRes in August 2014. The telephone poll was carried out by Populus between 17-20 October 2014.
- Bargaining on a low income: A better deal for consumers is sponsored by Provident Financial. The SMF retains absolute editorial control over its outputs.
- The Social Market Foundation (SMF) is a leading UK think tank established in 1989 with the aim of marrying market economies with social justice. We develop innovative ideas across a broad range of economic and social policy, taking a pro-market rather than free-market approach.