Issue: 07/08

Consumer Choice and Market Effectiveness

February 27, 2008

This week’s ATUG Opinion looks at developments in discussions about the role of Competition Policy and Consumer Policy which have been taking place at the OECD and which have considerable relevance to ATUG as we think forward over the next 10 years in our Future Forums and consider how the markets work effectively and where they are not competitive what regulatory response is best – access rules, anti-competitive conduct rules or consumer measures including contracts, switching procedures, and information. This work by the OECD underpins ATUG’s focus on issues such as broadband switching processes, international mobile voice and data services and our previous focus on Consumer Contracts (in particular for SMEs).

The first resource is a paper by Dr Patrick Xavier, Faculty of Business, Swinburne University of Technology. It draws on the proceedings of, and papers presented to, two OECD Roundtables convened by the CCP in October 2005 and October 2006. The proceedings of the October 2005 Roundtable are available on the OECD website here
The proceedings of the October 2006 Roundtable are available here
Dr Xavier’s paper is available here

“The regulation of the telecommunications sector has focused mainly on the supply side of the market including, for example, market entry and licensing, access to and use of networks, interconnection, control over retail and/or wholesale pricing.

This emphasis on the supply side has been appropriate since the task was to install effectively competing alternative suppliers in former monopoly telecommunication markets. As competition has developed and the number of new entrants in fixed and mobile telecommunication markets has grown, there has been increased attention by some telecommunications regulators on the consumer demand side. For instance, a ‘demand-side’ measure introduced in many OECD countries is the requirement for ‘number portability’ aimed at facilitating consumer ‘switching’ in the fixed line and mobile markets.

Such attention to the consumer demand-side is timely because informed consumers who are prepared to exert an ability to choose between competing suppliers are necessary to stimulate firms to innovate, improve quality and compete in terms of price. In making well-informed choices between suppliers, consumers not only benefit from competition, but they initiate and sustain it.

This report sets out to examine the available evidence of actual consumer behaviour and analyse implications for policy and regulation. It addresses questions of:
• whether consumers are satisfied with their present telecommunications provider;
• whether dissatisfied consumers decide to switch;
• how dissatisfied consumers could be equipped with the information and confidence to ensure that a decision to switch or not to switch is in their best interests; and
• how the approach to this task could take account of the findings of demand-side analysis that consumers may be influenced not only by ‘information asymmetry” but also by “systematic bias” in their decision-making?

This report arrives at a number of recommendations, including the following:
• Service providers in the communication sector should be strongly encouraged through self-regulation to develop a consumer bill of rights, to provide adequate and accurate information to consumers so that consumers may exercise effective choices and assert their rights and to put in place transparent and low cost procedures to facilitate consumers in changing service providers.
• Policy makers and regulators should develop a better and fuller understanding of the needs and motivations underlying consumer behaviour in telecommunications markets, especially those of vulnerable consumers (such as those in rural areas, the elderly, minors, disabled, those on low incomes, the unemployed).
• Policy makers and regulators, in conjunction with industry, could assist consumer participation in telecommunications markets by educating consumers about their rights, by raising awareness about new services and options offered by the market, and by making the process of switching in the fixed line, mobile and Internet markets easier, cheaper and faster.
• Regulators should consider requiring that all major operators provide complete, comparable, appropriate and accurate information to consumers through different channels (e.g. through leaflet, radio, consumer hotline and web based programmes) to enable consumers, especially vulnerable consumers, to quickly identify the most suitable and best value telecommunications plan.
• Regulators could use more effective means of targeting information to vulnerable groups to provide them with practical guidance about how they can get the best deal.
• Regulators could encourage third parties, including consumer organisations, to provide price/service-comparison facilities and other relevant information through consumer hotlines, websites, etc.
• Regulators could work with the fixed line (including Internet service providers) and the mobile network operators to develop and publicise a set of comparable indicators relating to quality of service.
• Regulators should ensure that the shortest possible time is taken to complete number portability for consumers switching between fixed line and between mobile service providers.
• Regulators should require that all Internet service providers ensure a simple, free (or at least low-cost) and quick transfer for consumers who choose to switch provider.
• Regulators should require “truth-in-billing”, and prohibit harmful business conduct and practices (e.g. by prohibiting mis-selling, misleading advertising). “

The second set of resources comes from the OECD’s Seventh Global Symposium on Competition, 21-22 February, 2008

OPENING ADDRESS BY OECD SECRETARY-GENERAL
"The Key Role of Consumers
Improving the interaction between competition and consumer policies is an important goal. Consumers – who are also voters – will not support the vigorous pro-competitive reforms that are needed unless they see the benefits clearly.

Consumers are crucial in the process of economic reform. They are the potential counterweight to the vested interests which oppose pro-competitive reform. Persuading consumers of the benefits of competitive markets and helping them make their voice heard is fundamental to the reform process."

THE ECONOMICS OF COMPETITION AND CONSUMER POLICIES: ONGOING WORK OF THE OECD CCP, Louise Sylvan, Deputy Chair, ACCC

"1. The project on Economics for Consumer Policy of the OECD Committee on Consumer Policy (CCP) arose out of a desire to create a clearer or better economic underpinning for the work in consumer policy – whose roots have tended to be primarily from a legal framework which focused on consumer rights. This work is complementary to that framework.

3. At the heart of the concept of the Toolkit is the notion that consumers do not only benefit from competition, they drive it – and whether they are able to do that well, is an important question. It is an important question not only for consumer outcomes; ultimately, it’s important for competitiveness of firms and more generally, it is one element contributing to the productivity of a nation.

4. The EU in its current Consumer Policy Strategy put the concept succinctly: Confident, informed and empowered consumers are the motor of economic change as their choices drive innovation and efficiency."

The slide pack is available here

THE ROLE OF CONSUMERS IN PROMOTING PRO-COMPETITIVE REFORMS

"1. Consumer welfare is a principal goal of modern competition policy. Hence, consumer interests should be a central concern in reform to improve efficiency and competitiveness. Competition policy motivated by the goal of consumer welfare can help overcome obstacles to reform, particularly when effective advocacy rests on broad consumer support.

2. Despite the prospect that structural reform will produce stronger growth and higher employment, it has proven hard to achieve and progress has been uneven. Many of the difficulties of reform can be explained in terms of the imbalance of perceived costs and benefits from change. It is difficult to overcome resistance to change from interests that profit from the status quo, and it is also difficult to assemble and motivate a consensus in the electorate to back reform, even though the public would benefit from it. Principles of “political economy” predict that consumers will be less likely than other interests to organise themselves to influence the policy process. Consumers thus need to get better organised, and representatives of consumer interests should be empowered to be more effective."

AUSTRALIA’S SUBMISSION ON THE INTERFACE BETWEEN COMPETITION AND CONSUMER POLICIES
“ Australia’s competition policy approach serves to foster and promote well-functioning markets, both through structural reform and, more specifically, dealing with anti-competitive practices. Effective competition lets consumers benefit from lower prices and greater choice. Consumer policy empowers consumers to operate more effectively in markets and addresses conduct designed to exploit or harm consumers. Appropriately applied, it enhances competition by enabling consumers to drive competition through the exercise of effective choice.”

HIGH SWITCHING COSTS: A BARRIER TO COMPETITION AND A DETRIMENT TO CONSUMERS
A survey of consumer behaviour and attitudes 2000-2005 - Summary and recommendations, Ms. Jill Johnstone, UK National Consumer Council

“When markets function properly, consumers can identify which product is best for them and switch if they want to get a better deal. This, in turn, encourages companies to compete vigorously to retain current customers and attract new ones. It ensures that companies cut costs and innovate in order to offer products that meet consumers’ needs at low prices. Switching has a particular importance in newly liberalised industries, where it helps to stimulate competition. However, markets do not always function properly, and consumers may be unable to switch providers or benefit from switching. In these cases, prices will remain high and product innovation and quality low.”

ATUG has had a long history of its members’ “moving markets”. The new discussion about how consumers/end users can be effective market participants is an important one in the context of the Productivity Commission’s review of Australia’s consumer policy framework (see here) and the recent refocusing by industry on advocacy and outcomes for industry. It will be important in coming debates that the end users voice is heard in transparent discussions about further reforms.