accc sylvan
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Competition and Consumer Policy: It’s all about Consumers!
Louise Sylvan
ACCC
Consumers drive competition
Consumers exercising
informed choice
Vigorous
competition
Competitiveeconomy
Productivityeconomic gains
Innovation, price competition
Active Consumers Active Economy
Consumers drive competition
Consumers exercising
informed choice
Vigorous
competition
Competitiveeconomy
Productivityeconomic gains
Innovation, price competition
Active Consumers Active Economy
Consumers drive competition
Vigorous
competition
Competitiveeconomy
Productivityeconomic gains
Innovation, price competition
Active Consumers Active Economy
Don’t worry too much
Market Failure
Transaction costs Agency problems Informational asymmetry
Government intervention may be appropriate
Information
Don’t worry too
much
Examining actual consumer outcomes:
Empirical data
Deregulating Electricity Markets Conclusions
decision complexity rather than conventional theories of rational decision making
Better consumer pricing information was needed – too hard to compare
Reducing choice may sometimes increase benefit
Behavioural Economics
What is it?
Branch of both Economics and Psychology
Different assumptions – suspends the assumption of perfect rationality Assumptions are based on empirical evidence or
experimental evidence rather than a normative theory
Behavioural assumptions of microeconomics (conventional)
King Island Brie
Grange Hermitage
Microeconomics rests on a set of assumptions about preferences. Preferences are complete, transitive, (well-ordered) monotone and stable.
Consumer behaviour in structurally sound, competitive markets, reveals their true choice – in aggregate at least. We infer what people want from what they choose.
What if?
King Island Brie
Grange Hermitage
What if?
King Island Brie
Grange Hermitage
Preferences are discontinuous
What if?
King Island Brie
Grange Hermitage
Preferences are not stable
What if?
Q
P
Jane’s demand curve (addiction)
Demand curve Jane would like to have
Our behaviour does not reflect our preferences?
What if?
We are concerned with equity and not just self-interest?
Assumption – rational behaviour at high levels of aggregation
Rational mean
Behaviour clustered around “rational” mean
BE questions this assumption
Rational mean
Behaviour clustered around some other point -- biased
Observed behaviour
While aggregate behaviour often conforms to assumptions of rationality, there are often systematic departures from rationality, and these are not necessarily in consumers’ best interests.
And behaviour can be fickle
Rational mean
Behaviour moves in response to minor stimuli
Observed behaviour
Decision-making
In general, our decisions are made on the basis of limited search (not even bounded rationality)
We are guided by heuristics (quick rules of thumb), which generally serve us well, but which sometimes lead to costly biases – i.e. away from our “rational” self-interest.
Some heuristics and biases
EndowmentOverconfidenceFramingAvailabilityPseudocertaintyAnchoringChoice overloadMyopiaSelf-control and discounting distortionsHerding and beauty contestsShifting preferences
Few “new” findings in behavioural economics – most are known to competent salespeople and experienced finance experts.
Contribution of behavioural economics is to systematize knowledge.
Fairness
Ultimatum game
Proposer – to propose division of a resource
Acceptor – to accept or reject division
Ultimatum game
Proposer – proposes division
Acceptor – accepts or rejects
Both benefit Neither benefits
Acceptor actually bases decision on perception of fairness. Limitation of Pareto assumptions – overridden by strong social norms concerning fair dealing
Fairness
Evidence that people:
engage in acts of generosity that cannot be expected to be requited
incur costs to punish those whose behaviour they disapprove of
Self-interest overridden by strong norms of fairness. Consumers are not indifferent to conditions of supply
An intervention in a market must be seen to be fair
Actions to preserve or improve fairness may be individually costly but collectively beneficial.
Choice and Information Overload
Evidence that past a level, consumers default or choose not to choose (they choose whatever or walk away creating dead weight loss)
Behavioural eco – optimum level of choice
Range of choice
Consumer benefit Conventional economics – more choice is better
FramingOur decisions are influenced by the frame:
“This account is subject to a 3 percent penalty if not paid within 30 days” OR “Payment within 30 days will attract a 3 percent discount”
Contains 8% fat 92% fat free
OR
Taking out a loan
Varying interest rates – the lower the interest rate, the higher take up of
the loan One example vs four examples of different
loan amounts and monthly payments – one example creates more take up of loan than
four examples Smiling picture of woman, smiling picture of
man
Context (framing) Matters
Contextual signals can matter significantly For men – 4.5%
Oooh!! That smiling guy on the letter is offering me a loan!
He looks just like Johnny Depp!
Powerful New Solutions?
Powerful New Tools?Use of Behavioural Defaults
Pennsylvania Auto insurance Option of limited right to sue Lower premiums Opt-out Transaction costs = 0
75% ‘selected’ full right to sue
New Jersey Auto insurance Option of limited right to sue Lower premiums Opt-in Transaction costs = signature
20% selected full right to sue
No
Yes
No
Is the market sound?Are consumers enjoying the
benefits of a competitive market?
Decision TreeDemand-Side Market Analysis
by Consumer Protection Regulators
Is there information failure?
Informational Instruments
Are there behaviouralbiases affecting consumerdecision-making andoutcomes?
Behavioural Instruments
CHECKS
TOOLS
CO
NS
UM
ER
(De
ma
nd
sid
e)
Other Instruments
Are benefits of intervention likely to
outweigh the costs of intervening to
empower or protect Consumers?
Are costs falling on vulnerable or disadvantaged
groups?
YES
STRATEGIES for compensation
or protection
Yes
NFA
NFA = no further action
No
STRATEGIES for improving
market for consumers
Yes
Yes
Types of Interventions
For the unsophisticated consumer: defaults (using anchoring and endowment bias) limited information, but in well-designed frames debiasing (bias warnings)
For the undisciplined: cooling off periods optional binding contracts
For everyone: Clever arrangements against consumers own weaknesses –
careful design of decision contexts
The task of a joined up agency
Consumer Protection Outcomes
Com
petit
ion
Out
com
es