Daily Bulletin

Daily Bulletin

The Conversation

  • Written by The Conversation
imageChoosing a mobile phone shouldn't be this hard.Image sourced from Shutterstock.com

Consumers today have easy access to a wide range of products and services. The task of choosing between hundreds of products or packages each having dozens of different fees however, is the opposite of easy.

Product and price variety gives consumers with varying tastes and usage patterns choice. But the overwhelming complexity of markets may have an anti-competitive effect: competition between firms is weaker when consumers are confused. Recent economic theory recognises the possibility that companies might have incentives to intentionally confuse their consumers by spuriously differentiating their products or by using complex price schedules.

There is also an increasing amount of empirical evidence that documents consumer biases such as myopia in decision making, choice overload and status-quo bias, that can potentially be taken advantage of by companies. In the market context, my own research shows that price and product complexity can be used by firms to soften the level of price competition in markets. Obfuscation leads to both frustration and mistaken choices at the consumer level and overall higher prices at the market level.

Although some instances of complexity can be identified as misleading conduct, such as the Nurofen spurious product differentiation case brought by the ACCC, in many instances it is difficult to distinguish genuine price/product variety from obfuscation.

Acknowledging that complexity in markets constitutes a market failure the regulator’s task is to rectify the market failure, but how? Unlike the cases of misleading conduct, complexity and choice abundance is a fuzzy and moving target that is difficult to regulate.

Nudge economics

One increasingly popular option is to help consumers deal with the complexity. Behavioural economics provides several potential remedies, for example by designing optimal defaults in case the consumer fails to make a choice, or standardising services to increase comparability. These are commonly referred to as “nudges”, which do not restrict choices but simplify them for some people.

Many studies examine the effectiveness of such nudges in helping consumers make better decisions. But we don’t yet understand the possible unintended consequences of these nudges and how markets would respond to them. The first problem is the difficulty for the regulator to determine the optimal default option. Defaults are very powerful, and a mistakenly chosen default can be extremely bad for the consumer. With great power comes great responsibility.

Another potential problem is that optimally designed default options might in the long run make consumers dependent and reduce their incentives to shop around and switch between companies, which in turn might lead to softer competition between companies. There is a need for both theoretical and empirical research on these issues.

Consumer choice

Solutions to a market failure often come not from the government but from the market, through new technologies and new types of businesses. For example, third party comparison sites sometimes help consumers deal with the difficult task of evaluating multiple options. Although such sites have worked for some services, such as hotels and restaurants, others failed to provide a solution. And some created new problems. Recognising the failure of these services in private health insurance, the Australian government started a comparison service of its own.

For other markets, there is hope that soon a virtual robot assistant will track our behaviour, measure our preferences, scrape the web for offers and recommend the optimal product. Until then immediate action from regulators is likely to be necessary and useful. It is also essential to test the effectiveness of these actions through randomised control trials and other careful evaluation methods.

Law and regulation can also help change social norms. We don’t accept being charged seperately for cutlery, salt, pepper, chairs and visits to the restroom in a restaurant but we do accept multiple fees in health, finance and telecommunication services. Regulations encouraging all-inclusive fees help consumers demand single and simple quotes for services.

In the long run, solutions will require consumer adaptation and consumer activism. Ultimately, consumers are the best judge of what they want and prefer to make their own decisions even when these are often the wrong decisions. Which is why the most attractive solutions will empower consumers rather than make the choice for them.

Kenan Kalaycı does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

Authors: The Conversation

Read more http://theconversation.com/confusopoly-why-companies-are-motivated-to-deliberately-confuse-39563

Writers Wanted

The missing question from New Zealand's cannabis debate: what about personal freedom and individual rights?


NBN upgrades explained: how will they make internet speeds faster? And will the regions miss out?


The Conversation


Did BLM Really Change the US Police Work?

The Black Lives Matter (BLM) movement has proven that the power of the state rests in the hands of the people it governs. Following the death of 46-year-old black American George Floyd in a case of ...

a Guest Writer - avatar a Guest Writer

Scott Morrison: the right man at the right time

Australia is not at war with another nation or ideology in August 2020 but the nation is in conflict. There are serious threats from China and there are many challenges flowing from the pandemic tha...

Greg Rogers - avatar Greg Rogers

Prime Minister National Cabinet Statement

The National Cabinet met today to discuss Australia’s COVID-19 response, the Victoria outbreak, easing restrictions, helping Australians prepare to go back to work in a COVID-safe environment an...

Scott Morrison - avatar Scott Morrison

Business News

What happens to all those pallets?

Pallets — they're not something everyday people often give much thought to. But they're an integral part of any business which receives or distributes large quantities of goods. But once the goo...

News Company - avatar News Company

Ten tips for landing a freelance transcription job

Transcription jobs are known to be popular in the field of freelancing. They offer fantastic job opportunities to a lot of people, but there are some scammers who wait to cheat the freelancers. ...

News Company - avatar News Company

How To Remove Rubbish More Effectively

It can be a big task to remove household rubbish. The hardest part is finding the best way to get rid of your junk. It can be very overwhelming to know exactly where to start with so many option...

News Company - avatar News Company

News Company Media Core

Content & Technology Connecting Global Audiences

More Information - Less Opinion