Alex Chisholm on consumer engagement in a digital world

Speech given by Alex Chisholm, CMA Chief Executive, at the CCRP 2016 Competition Policy Roundtable in London.

Alex Chisholm

Conference on competition implications and social obligations in a digital world

Why ‘sleepers’ can’t always be left to ‘sleep’

Sleepy consumers

I don’t know whether boarding schools still make their pupils sleep in large dormitories. In fiction, at least, the tradition survives: Hogwarts School of Witchcraft and Wizardry is organised into houses in which the boys and girls sleep in communal dormitories. I’d like you to hold onto this picture of massed ranks of sleeping figures for a moment.

Now I would like you to think about a dormitory on a far grander scale – a dormitory in which not dozens but millions of souls are sleeping away, perfectly oblivious to the realities and choices of the sentient world. I speak here of one of our large energy suppliers, or a British high street bank.

I am using ‘sleeping’ in the sense that Richard Posner and his eminent judicial colleagues in the US Court of Appeals used it in their April 2015 judgement in the Text Messaging antitrust suit against Verizon Wireless:

‘sleepers’ being a term for a seller’s customers who out of indolence or ignorance don’t shop but instead are loyal to whichever seller they’ve been accustomed to buy from

Low consumer engagement in energy and banking markets

And to speak of sleep in such contexts is barely exaggerating.

In the CMA retail banking investigation, the GfK survey of personal current accounts (PCAs) found that 37% of customers had been with their main PCA provider for more than 20 years, and a further 20% for between 10 and 20 years.

The situation in energy is not so different. 34% of respondents to the CMA-commissioned survey last year had never considered switching supplier.

Now let me immediately acknowledge that it is the case – in both banking and energy – that one of the main reasons given for not switching is satisfaction with one’s current supplier. So could it be the customers are just loyal and satisfied, not ‘sleepy’ at all? Well there is more to the story.

The energy market investigation survey found that 68% of respondents who have considered switching supplier but never shopped around or switched are not confident that they are on the right deal. And 16% distrust their own supplier – and this a regulated supplier of an essential utility.

Other surveys have shown that consumers are very concerned by energy costs – Which?, for example, found that 76% of consumers worry about the cost of energy. As well they might. The average annual household spend on energy is about £1200. For most households, energy costs are one of the top 2 or 3 household expenses. And yet, as the initial findings of the CMA inquiry have shown, most consumers are leaving substantial savings on the table by not making the effort to switch. For customers of one of the Six Large Energy Firms on a duel fuel standard variable tariff (SVT) – and that’s most of us – just optimising within the product set of your current supplier would save on average £82 a year.

So it’s hard to see customer satisfaction and value adequately explaining the observable high inertia.

Under-active consumers and inadequate competition

Instead we have this phenomenon of the ‘able but inactive’, the ‘healthy but sleepy’ consumer. Does it matter? If apparently the consumer can’t be bothered, should we be?

Well, at least at this stage in the CMA’s 2 big market investigations, the answers appear to be ‘yes’ and ‘yes’.

In both the energy and banking cases, the inquiry groups have provisionally reached the view that adverse effects on competition arise from, inter alia, these low levels of customer engagement, acting in combination with the strong market positions of the main incumbent firms.

Even standing outside these independent inquiries, as I do, I must say I find it quite easy to understand why this is so. Without the full discipline of consumers actively searching for the best deals, and then acting on this, what need is there for the established players to compete hard on price and quality? And if most of the potential customers are fast asleep in the bank or energy ‘dormitory’, what hope has the new entrant to attract their custom, however attractive its wares? Especially when the incumbent, wary of disturbing the sleeping, tip-toes around the customer dorm, with auto roll-overs, silent expiry of special offer periods, and all the rest.

One way of characterising this low consumer engagement problem is as a market failure in which under-active consumers, by not exercising choice, impose negative externalities on other consumers from the consequential weakening of competition.

Or, to put it in a more positive frame: the positive externality that the active consumer generates by searching is foregone when that consumer disengages.

Comparison of remedies for weak consumer engagement

Of course weak consumer engagement is not a new phenomenon, and the UK competition authorities have been here before. Financial services has been a particularly rich field for problems of this kind, for reasons well analysed in the Financial Conduct Authority’s (FCA) behavioural economics study published in 2013.

The Competition Commission (CC) tackled weak consumer response in a series of financial services market investigations in the Noughties, notably extended warranties (2003), store cards (2005), home credit (2006) and payment protection insurance (PPI) (2009), and then in 2014 – finishing within the CMA – payday loans. Looking back through these reports with colleagues here, we’ve discerned an evolution in the response of the competition authorities to problems of this kind.

Let me borrow the helpful ‘Triple A’ behavioural economics framework developed by the Office of Fair Trading (OFT). Consumers need to be able to access, assess and act on information for competition in markets to work well. The earlier CC market investigations – extended warranties and store cards – produced remedies that aimed to improve customers’ access to information, with various enhanced transparency requirements. Armed with this enhanced information, consumers were expected to go out and bargain.

In the later inquiries, into home credit, PPI and payday loans, these ‘access remedies’ were supplemented by arguably more intrusive remedies to help consumers assess the information, such as requirements on providers to make their terms of supply available to regulated price comparison websites (PCWs). In the PPI case, a complete ban was imposed on point-of-sale provision, explicitly on the grounds that consumers could not make comparative assessments in that situation.

That brings us up to the present day, when we have remedies under consideration which also operate in addition at the third stage in the OFT framework, by helping consumers to act.

Among the questions posed by the energy market investigation in last summer’s notice of possible remedies were whether PCWs should be given access to customer data in order to allow them to facilitate the switching process for consumers, and whether there should be penalties for firms that fail to switch consumers within the mandated period.

Subsequently the energy inquiry group has put out additional possible remedies for discussion, including the so-called ‘French remedy’ – so-called because it was an interim measure on Gaz de France (GDF) successfully applied for by the French competition authority in the context of an abuse of dominance case – whereby customers who are on the regulated tariff are subjected (where they have not chosen to opt out) to some kind of ‘alarm call’ from alternative providers, trying to wake them from their slumbers.

In the equivalent document from the retail banking inquiry, possible remedies include prompts for consumers to act, further improvements to the switching process and again, the remedy of freeing up the availability of customer data to help the competitive process.

Relevant behavioural economic analysis

So there does seem to be somewhat of a trend towards remedies that may be effective at all 3 stages in the ‘Triple A’ framework.

I wonder what has driven this?

Well no doubt – with a nod to the lawyers – the specific features of the markets under examination.

But also, I hope, the growing body of behavioural economic evidence that has become available over this 12 year period on just how constrained consumers are by biases and ‘bounded rationality’, and how adept some companies have got at exploiting these biases.

This evidence has probably encouraged competition experts to rely less on the model of the rational economic man, who when furnished with more information by the competition authority, delivers on his neoclassical promise. And instead to favour a more subtle analysis of how consumers interact with markets, and hence a more extensive set of demand-side interventions to help restore healthy competition.

In one of the latest publications in this field, ‘Phishing for Phools’, Nobel Prize-winning economists George Akerlof and Robert Shiller go so far as to warn that ‘letting people be “free to choose” … leads to serious economic problems’.

Along with a mass of examples of companies manipulating consumers into making self-evidently poor choices, Akerlof and Shiller show how a stable equilibrium can be established, but on terms which are harmful to consumers’ interests, and beyond the power of the market to resolve.

This reminds me of what I heard about the CC’s PPI investigation, in which a number of the companies were apparently ashamed of the poor quality of their products, but protested in their evidence to the inquiry group that they could not act otherwise, as the high profits on PPI helped to restrain the headline rate for the main loan product, and that was the only real component in consumer decision-making. In short, a stable but harmful equilibrium.

It is this feature which provides, at least to my way of thinking, perhaps the most powerful ‘Call To Action’ for a competition authority like us. If the market has got into a bad way and we can’t see how it can credibly resolve its own problems, we have a clear mandate for action. And if we can get the remedies right, so they restore the market to health, in a proportionate way and without nasty side-effects, we will have done our job.

Impact of digital

Lastly – and perhaps belatedly – what’s the digital bit here?

Well it’s a two-edged sword, isn’t it?

The digital cornucopia and cacophony can help sleepy consumers to ‘wake up and smell the coffee’. Hard-to-miss advertising can drive consumers to price comparison websites which help them to access, assess and act – and this can help drive competitive intensity and increase consumer value, as we have seen in markets such as insurance.

Furthermore, the wider availability of usage data can help third party intermediaries – whether enterprises or charities – to help consumers to help themselves, by optimising their usage or their choice of provider, or providing additional bargaining power.

And the regulatory toolkit is also extended, with innovations such as application program interfaces (APIs), or rules which make PCWs work better, helping to raise the returns on searching and switching.

But the digital revolution also makes it easy to customise offers so as to cater for the active and assertive and leave the rest on rotten deals – tapping just the fittest on the shoulder to wake them from their sleep, without disturbing the rest of the dormitory.

And if the best deals are all online, what about the rest of the population? – which may include consumers that are vulnerable in other ways, for example the very elderly.

Adam Smith’s ‘invisible hand’ brought with it some invisible egalitarianism by which the strong (awake, savvy) protect the vulnerable and sleeping. The more aggressive price discrimination we see today – facilitated by digital profiling – weakens the link between these groups.

And people can be woken by digital means from their long slumber, but only momentarily. Like the poor victims of ‘sleeping sickness’ in Oliver Sacks’ classic book and film ‘Awakenings’, they then move around and begin to exercise choices … before relapsing back into the permanent digital sleep of ‘single-homing’.


So digital won’t necessarily bail us out. It looks like we will have to continue to find ways to wake up the sleepers, and not only for their good, but for others too.

In this sense we might even adapt the conference title, and conclude that ‘Competition is a social obligation in a digital world’.

Published 25 January 2016