The Road to Confusopoly

1. The Road to Confusopoly Professor Joshua Gans University of Melbourne

2. 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?

3. Search Model Consider an industry with several producers of an homogenous product A consumer considering switching suppliers will switch if: Pold + D > Pnew where D are switching costs including any disconnection fees A consumer will only search for a new supplier if: Prob[Pold + D > Pnew] > S where S are search costs

4. Diamond Paradox With many suppliers, why would you expect to get a better deal? If all highly competitive, then can�t do better Only if you think firms will offer you a customer specific deal; but will they? According to Diamond (1971): each firm won�t lose many customers by charging a slightly higher price than other firms In equilibrium: all charge the monopoly price and no search occurs.

5. �Sleepy Incumbent� Model Customers may expect to get a better deal if switching from an incumbent Implication: entrant�s should advertise pricing deals Incumbent may accommodate this by charging higher prices (Guilietti, Waddams-Price, Waterson, 2005) Should see incumbent retailers charge a higher price than entrants in an area

6. Which Model? Sample of One Which model applies in Victoria? Diamond Paradox or Sleepy Incumbent With this in mind, 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

7. Sample of One: which is cheaper?

8. GST and Time Adjust

9. Compare with Cap

10. Total Saving = $22.64; S = 3 hours

11. 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

12. Victorian Gas Demand

13. 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 �Diamond Paradox� (rather than �Sleepy Incumbent� model) alive and well in Victoria Would we have been better off keeping a single incumbent and inviting entry (as per telcos)?

14. Behavioural Economics New economic approaches for dealing with consumer irrationality Basic idea: When faced with an upfront cost and future options, consumers with over-weight option value and spend too much upfront When faced with an upfront benefits and future avoidable costs, consumers will under-weight ability avoid costs and spend too little upfront

15. Implications for Switching Consumers will under-weight importance of disconnection fees Consumers will under-weight ability to opt out of automated payments to switch in the future Consumers will under-weight future switching costs Consumers will fail to invest in information to make choices transparent And firms will not have an incentive to provide transparency as consumers will demand more upfront to compensate for switching costs later on.

16. Policy Responses? Likelihood of consumer choice providing a locus for effective competition is bleak Energy retailing looks like a confusopoly Would a regulated pricing structure that forced simplicity and transparency be better? Would a consumer choice regime that required a choice be effective? E.g., an audit of individual choices or an annual auction for customers?