Protecting Competition to Protect Consumers Does Behavioural Economics Support this Contention

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Protecting Competition to Protect
ConsumersDoes Behavioural Economics Support
this Contention?

• Joshua Gans
• University of Melbourne

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The contention

• If consumers can be exploited (i.e., pay for
  goods they dont value enough), wont market
  forces fix this?
• If there is competition, there will be at least
  some suppliers who will find it profitable to
  actually supply consumers with products they
  value.
• So competition protects consumers

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The issue

• Today, Stephen gets asked to give a talk on
  regulation on the 18th July and happily accepts.
• On the 11th July, Stephen wishes he 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, Stephen does not anticipate that he will
  regret, in July, his 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

• Actual consumer behaviour
• Main result
• Cases
• Credit Card Regulation
• Bundling
• Conclusion

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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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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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Welfare Impact
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Impact of reduced competition
Overall welfare is increased! Consumer welfare
may not be improved.
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Credit Card Regulation

• RBA concern with rising consumer debt
• Was it a competition concern?
• Theoretical debate
• No significant change since reforms
• Consider actual consumer behaviour
• Naivety implies low fees and high interest rates
• Interchange fees still dont matter
• Opening up access makes this worse
• Surcharging can help

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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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Conclusions

• Implication of behavioural economics cannot rely
  on competition to protect naïve consumers
• Difficult to exercise consumer choice
• Competition generates more supply of things they
  dont want
• Education and information are public goods
  (under-provision in market place)
• Regulators should focus attention on undesirable
  practices
• E.g., disconnection fees, automatic renewal fees,
  unbundling
• Critical for future issues such as cross-media
  ownership

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Paternalism (Rabin)

• What practices are candidates for ACCC scrutiny?
• Weak rule if eliminating the practice wont hurt
  rational consumers but will help others then
  eliminate.
• Weaker rule eliminate practices for which there
  exists no theoretical profit-maximising
  justification when consumers are rational.