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To switch or not to switch

At the heart of competition lies us, the consumer, whose freedom to choose underpins our ability to discipline suppliers and to influence market prices. The UK Competition and Markets Authority recently highlighted that weak consumer responses in the retail energy and banking markets have played a role in limiting effective competition. 

The energy market regulator, Ofgem, has also been trying to encourage consumer activity, emphasising the role of the customer as not only the beneficiary, but also an important driver of effective competition. The work of Professor Catherine Waddams at the Centre for Competition Policy (CCP) at UEA has been at the forefront of exploring why so many of us consumers do not switch to cheaper energy providers. 

Understanding inertia isn't easy, although arguments that highlight the time it takes to change supplier, demographics and consumer expectations have all been studied in the past.

While some consumers prefer energy deals more suited to them as opposed to, for example, cheaper tariffs, others feel they have better things to do than worry about their energy providers. There are also people who cannot switch and some who choose not to.  Each issue leads to the question of inertia and the consumer's inclination to change suppliers. 

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UNDERSTANDING INERTIA

To understand such inertia further, Professor Waddams and Dr Miguel Flores explored whether or not switching energy supplier related not only to obvious drivers such as expected savings, but also to six general attitudes to shopping, such as 'life is too short to worry if you are getting the best deal around' or ‘I would be upset if I found out later that I could have got a better deal’. On the basis of these attitudes they found three distinct groups of consumers emerge: one group looked around a lot for cheaper deals and took advantage of them; one was short of time, but switched to better deals when they found them; and the third group were more likely to stick to a product they liked and were less likely to switch energy suppliers.  

Professor Waddams and Dr Flores found that different factors drove searching and switching behaviour within each group.  For example, in groups 1 and 3, searching is associated with more frequent use of the internet, while there is no such relation in group 2; however this group is more likely to search and switch if they are confident in estimates of potential gains, a factor which is not associated with activity for the other two groups.  

The only consistent influence on switching across the groups was the size of anticipated savings, but these expectations too varied between consumers. In particular, older consumers expected lower savings than others, which explained less switching among the over 65s. These findings show policy makers that they need to find different mechanisms to encourage more consumer activity and entice suppliers to charge lower prices to attract them.

As Flores and Waddams show, consumers do not always behave as standard economic models predict when changing supplier or in choosing their supplier, and this has an impact on how the market functions. It is at this point where the case for better regulation from regulators like Ofgem can be made. 

Some consumers have difficulty in participating in the market because of debt, cognitive limitation, or lack of information, and others may prefer not to play a direct part in the market because of uncertainty or the time involved. Professor Waddams and her colleagues argue there could be an opportunity for some consumers, particularly people who may require protection within the market, to opt out of individual decisions in the market, and "collectively switch" their suppliers.

Such a scheme would invite suppliers to bid for groups of consumers using an auction-type framework to offer them a better deal; but unlike most existing collective switches, consumers would be changed to the cheaper option unless they opt out of the auction or the offer. The supplier with the lowest tariff could then offer their services, fairly, to a market that may have been vulnerable otherwise. The CCP team has suggested that this would be a useful addition to the Competition and Markets Authority’s (CMA) proposals to make the energy market work better.

THE NEED FOR BETTER REGULATION

According to Professor Waddams, 2016 could be an important year in regard to this framework. "The Competition and Markets Authority has just produced a long report on the energy sector," she explains, "and one of the things they put a lot of faith in is smart meters and the additional information that they will provide for consumers." Based on this, it is believed that consumers will be able to make more informed decisions when it comes to their energy suppliers and may be more likely to switch as a result. 

But the work on consumer inertia by Professor Waddams and colleagues raises doubts about how actively consumers will respond to these extra data. 

The energy regulator and the CMA have recognised the importance of consumer activity, and work at UEA, in particular that of CCP, will continue to provide valuable evidence on consumer behaviour and to challenge regulatory assumptions.  

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Prof Catherine Waddams

Professor of Regulation, Norwich Business School

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