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Competition policy should make it easier for consumers to switch suppliers

Originally Published 09 April 2003

Competition policy is traditionally concerned with regulating firms: controlling mergers, price rigging and so on. But as new research by University of Warwick Economist Professor Michael Waterson shows, policy should equally be concerned with making it easier for consumers to switch suppliers, so assisting markets to work more competitively. For example, some people are still paying too much for electricity despite the arrival of a competitive market.

Professor Waterson presents his findings at the Royal Economic Society's Annual Conference on Wednesday 9 April. The analysis starts from a simple point: if every consumer leaves it up to others to search out cheaper suppliers, all suppliers have the incentive to charge a monopoly price ? the price that would exist if there was only one firm in the market. This happens however many suppliers there are in the market. Therefore, a market that seems competitive may in fact not operate in a competitive manner.

When is this more likely to occur? Professor Waterson suggests that it happens in markets such as banking, which exhibits very little switching, and markets where there is no history of changing supplier, such as electricity and gas supply.

The study explores developments in electricity supply in order to make the point. Electricity is an ideal product for this purpose since it is so widely used and it can be viewed as essentially a single (homogeneous) product. Therefore we might think consumers would be very keen to change supplier in response to price differences.

In fact, they are not particularly keen, so that there is still a substantial benefit to being the original (incumbent) supplier in the market. Indeed, such people are still being charged 'over the odds' for their electricity by 30-40 pounds a year, several years after the market was opened up to competition.

In some sense, this analysis suggests it is consumers who have themselves to blame. If only they were less loyal to uncompetitive suppliers, firms would be forced to lower prices.

But it does lead to a new view on competition policy. Traditionally, competition policy was concerned with regulating firms: controlling mergers, price rigging and so on. The new insight is that policy should equally be concerned with making it easier for consumers to switch suppliers, so assisting markets to work more competitively.

Indeed, the UK's Office of Fair Trading is actively thinking along these lines in tackling difficult-to-regulate markets.

For further information contact:

Professor Michael Waterson, Department of Economics,
University of Warwick
Tel: 024 7652 3427, michael.waterson@warwick.ac.uk

Peter Dunn, Press Officer, University of Warwick
Tel: 024 7652 3708 Mobile 07767 655860
P.J.Dunn@warwick.ac.uk

RES Media Consultant Romesh Vaitilingam on 07768 661095

Notes for Editors: 'The Role of Consumers in Competition and Competition Policy' by Michael Waterson will be presented at the Royal Economic Society's 2003 Annual Conference at the University of Warwick on Wednesday 9 April. Professor Waterson is in the Economics Department at the University of Warwick. Some aspects of the research relate to a wider project on energy markets engaged in by Waterson, Monica Giulietti and Catherine Waddams, funded by the Leverhulme Trust.