The impact of consumers on market competition

Analysis by Professors Michael Waterson and Gregory Crawford has been used by regulators to increase competition within markets by empowering consumers to make efficient choices.

What did the research show?

Looking at the retail, banking, insurance and energy industries, Professor Michael Waterson demonstrated how two consumer activities – searching for better deals and switching to new providers – are crucial for driving market competition. He highlighted how consumers are unwilling to switch providers even given large potential gains, and pointed to obscure price information and prohibitive switching penalties that make it difficult for consumers to choose the best deals.

This challenged the conventional wisdom that increasing the number of firms in a market is sufficient to generate competition and make consumers better off. Instead, price and product information, and consumers’ willingness to exploit it, are necessary for markets to function effectively.

In research commissioned by Ofcom, Professor Gregory Crawford estimated the costs of automatically renewable contracts in the UK telecommunications market. He demonstrated a clear link between automatically renewable contracts and reduced levels of consumer switching.

What happened as a result?

Professor Waterson’s research and policy recommendations have been used in market investigations by the Office of Fair Trading and the Competition Commission, enabling them to identify barriers to searching and switching and implement regulations to help consumers overcome them. His work has also been used by the Australian Competition and Consumer Commission, and has been prominently cited in policy documents by the UK Government, European Commission and World Bank.

Professor Crawford’s research directly impacted Ofcom’s decision to ban automatically renewable telephone and broadband contracts in the small business and residential sectors from December 2012. This has an estimated benefit to consumers of at least £120 million per year.

References to the research

1. Waterson, M., 2003, The role of consumers in competition and competition policy, International Journal of Industrial Organization, v21, 129-15.

2. Giulietti, M., Waddams Price, C., and Waterson, M., 2005, Consumer choice and competition policy: A study of UK energy markets, Economic Journal, v115, 949-968.

3. Giulietti, M., J. Otero, and M. Waterson, 2010, Pricing behaviour under competition in the UK electricity supply industry, Oxford Economic Papers, v62n3, 478-503.

4. Crawford, Tosini, and Waehrer, 2010, Empirical analysis of BT's automatically renewable contracts, report prepared for Ofcom, August 2010.

5. Crawford, Tosini, and Waehrer, 2010, Empirical analysis of BT's automatically renewable contracts, supplemental report prepared for Ofcom, February 2011.

6. Crawford, Tosini, and Waehrer, 2011, The Impact of "Rollover" Contracts on Switching Costs in the UK Voice Market: Evidence from Disaggregate Customer Billing Data, CEPR Discussion Paper No. 8693, December 2011. Under revision for resubmission to the Economic Journal.