The Road to Confusopoly-Telcos

8/8/2019 The Road to Confusopoly-Telcos

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Real Consumers and

Telco Choice:

The Road to Confusopoly

Professor Joshua GansMelbourne Business School

University of Melbourne

Presentation to the Australian

Telecommunications Summit,

Sydney, 21stNovember 2005


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November, 2005CoREresearch

I

s Competition Enough? Can competition enable consumer choice?

It is a necessary condition

Consumers need options

But is it sufficient?

Can consumers make the necessary comparisons?

Will competition reduce exploitation ofconsumer irrationality?


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Confusopoly Scott Adams: a group of companies with

similar products who intentionally confuse

customers instead of competing on price.

Examples: energy retailing, insurance,

mortgages, credit cards, etc.

But what about telecommunications?


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Search Model Consider an industry with several producers of an

homogenous product A consumer considering switching suppliers will

switch if:Pold>Pnew + D

where D are switching costs including any disconnectionfees

A consumer will only search for a new supplier if:Expected Savings >S

where Sare search costs


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SleepyI

ncumbent Model Customers may expect to get a better deal if

switching from an incumbent

Implication: entrants should advertise pricing deals (highmarketing spend relative to their market share)

Incumbent may accommodate this by charging higher

prices (Guilietti, Waddams-Price, Waterson, 2005)

Should see incumbent retailers charging a higherprice than entrants in an area


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Energy Retailing In July, 2005, I considered energy retailing in

Victoria

Utilising the Essential Services Commission calculator Ifound that the complex pricing schemes of AGL, Origin

and TRU were identical and equal to the regulated cap

Evidence for the Diamond Paradox

Would telecommunications be better given that it isbased on an incumbent/entrant model rather than adivided incumbent model?


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Which Model for Telcos? Which model applies in telecommunications?

Diamond Paradox or SleepyIncumbent

With this in mind, examined choice between

fixed line versus mobiles for long distance

Are these substitutes for consumers?

(Thanks to Nera for data gathering and analysis)


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Plans (calls to landlines)Telstra

Complete

Telstra Plus

1.49

Optus

Mobile

Vodafone Hutchison

Per minute

charge23c (peak), 15c

(off peak)

24c (peak), 12c

(off peak)60c 60c 70c

Surcharge 35c 35c 20c 20c 30c

Cap


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Assumptions Calls modelled are long distance within Australia, and to mobiles within Australia; Distributions of call durations as below, with means of 5 and 10 minutes

respectively; Ownership of a mobile on a base plan (the lowest cost) is assumed for each

mobile network; Calls switched to mobiles have the same distribution as the distribution they were

drawn from. That is, consumers do not only switch calls of a particular durationfrom fixed to mobiles - this is a future line of analysis;

50% of calls are in the peak period;

70% of calls are to fixed lines, 30% to mobiles. The phone of choice isindependent of whether the call is made in peak period or not this assumption

can easily be relaxed with appropriate data; and 45% of calls to mobiles are to Telstra mobiles (reflecting Telstras share of the

mobile market).


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Call Patterns (5 min average)

0.000

0.002

0.004

0.006

0.008

0.010

0.012

0.014

0.016

0.018

0 2 4 6 8 10 12 14 16 18 20

Duration of call (minutes)

Density


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Switching from Telstra

Complete to Mobile

Optus

Vodafone

Hutchison

5 min

average

Nera analysis

-55

-45

-35

-

5

- 5

-5

5

5

5

35

4

6

8

4

6

Minutes switchedper month

$permonth

Optus Vodafone Hutchison


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Switching from Telstra Plus

1.49 to Mobile

Optus

Vodafone

Hutchison

5 min

average

Nera analysis

-55

-45

-35

-

5

-

5

-5

5

5

5

35

4 6 8

4 6


$permonth



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Switching from Telstra

Complete to Mobile

Optus

Vodafone

Hutchison

10 min

average

Nera analysis

- 0

-4 0

-3 0

-

0

-1 0

- 0

0

1 0

0

3 0

0

00 400 600 800 1000 1

00 1400 1600


$permonth



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Switching from Telstra Plus

1.49 to Mobile

Optus

Vodafone

Hutchison

10 min

average

Nera analysis

-

0

-4

0

-3 0

-

0

-1

0

-

0

0

1 0

0

3 0

0

00 400 600 800 1000 1

00 1400 1600


$permonth



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Summary Difficult to compare price offers

Depends on a consumers specific calling pattern.

Networks differentiate on call duration Mobiles are a potential substitute for fixed line calls

Imperfect analysis but substantial savings possible

SleepyIncumbent (rather than Diamond Paradox

model) alive and well in telcos

Despite competition regulated Telstra prices still important.


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Reform Option? Portuguese Competition Authority analysis

Conclusion:

Wide number of mobile plans difficult for consumer toassess

This impeded price competition

Reform:

Require all networks (and agents) to provide a web-basedprogram to allow consumers to identify the cheapest plan

Supply information to allow regulator to host a programto allow consumers to compare competing plans betweenmobile networks.


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Can competition protect

consumers?

Re-considering bundling


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The contention If consumers can be exploited (i.e., pay for

goods they dont value enough), wont market

forces fix this? If there is competition, there will be at least

some suppliers who will find it profitable to

actually supply consumers with products theyvalue.

So competition protects consumers


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The issue In May, David gets asked to give a talk on

regulation on the 21st November and happily

accepts. On the 17th November, David wishes he

could defer giving the talk even though

nothing has changed.

This lack of self control is common.


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its even worse In May, David does not anticipate that he will

regret, in November, his decision to give the

talk.

This is a common failure to anticipate your

future position it is a naveapproach.


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The point


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F

rom The Onion

LOMPOC, CAThe Bally Total Fitness membership

purchased Monday by Alex Scarbe already appearsdestined for failure. "I really should go buy somenew shoes, so I can come back tomorrow and workout," Scarbe said, moments after completing themembership paperwork. "Just getting in here andsigning up is enough for today. I think I'll reward

myself with a smoothie." Scarbe will return toBally's twice in April, then once in May to use thewhirlpool, and ultimately cancel his membership in2007, when he notices Bally listed on his credit-cardstatement.


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Supplying what they demand If consumers lack self-control but are

otherwise sophisticated, firms will offer

products to help them commit E.g., low unit price for gym visits

If consumers lack self-control but are nave,

firms will exploit this E.g., extract payments for automatic renewal fees


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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 optionvalue and spend too much upfront

When faced with an upfront benefits and futureavoidable costs, consumers will under-weightability avoid costs and spend too little upfront


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I

mplications for Switching Consumers will under-weight importance of

disconnection fees

Consumers will under-weight ability to opt out ofautomated payments to switch in the future

Consumers will under-weight future switching costs

Consumers will fail to invest in information to make

choices transparentAnd firms will not have an incentive to provide

transparency as consumers will demand more upfront tocompensate for switching costs later on.


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Themes Demand in a market is based on actual consumer

behaviour. For time-based consumption, nave consumers will place

too little weight on future costs and anticipate gettingmore value than they actually receive

Consumers will purchase today more than they would ifthey anticipated their wants in a sophisticated manner

Over-consumption for any given price Competition works to ensure consumers are

supplied with what they demand at a lower price notwith what they want.


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WelfareI

mpact

Supply

Demand

Nave Demand

Pn

Qn

P*

Q*

Welfare

Loss


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Impact of reduced

competition

Supply ith

competition

Demand

Nave Demand

Pn

Qn

P*

Q*

Supply ithout competition

Pm

Qm

Overall elfare is

increased!

Consumer elfare

may not be improved.


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Bundling and add-on pricing

Buy one product (hotel, groceries) and then buyanother (phone calls, petrol)

Consumer reaction Sophisticated consumers anticipate add-on prices and

substitute away (benefit of lower price for initial good)

Nave consumers do not anticipate prices and over-consume

Firms price first good low and naives cross-subsidise sophisticates

Suspicious of bundling without any efficiency orvalue rationale.


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Educating consumers

Under monopoly, May have incentive to educate naives if dont

want to price discriminate against them Under competition,

If educate a nave, then they learn to substituteaway go to another firm and receive cross

subsidy No incentive for a firm to educate

Education is a public good


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Conclusions

Implication of behavioural economics: cannot rely oncompetition to protect nave consumers Difficult to exercise consumer choice

Competition generates more supply of things they dont want Education and information are public goods (under-

provision in market place)

Regulators should focus attention on undesirable practices E.g., disconnection fees, automatic renewal fees, unbundling

Critical for future issues such as cross-media ownership

Documents

The Road to Confusopoly-Telcos