In late May, CFA, in conjunction with CHOICE, hosted a workshop on the forthcoming federal competition review. Consumer advocates were given the opportunity to engage with the appointed review panel, as well as presentations by competition law experts and representatives of consumer organisations. Alan Kirkland, CEO at CHOICE was one of the presenters, and gave the following account of his view of the role of the consumer in healthy, competitive markets.

Recently I spoke about the competition review at the National Consumer Congress, one of the key points I was trying to make there is that if you want to get outcomes for consumers, it’s not enough to only care about consumer protection—you need to have an interest in competition too.

That’s because they have to go together—they are two sides of the one whole.

It will always be hard to advance the interests of consumers in an imperfect or inefficient market. You can have the best consumer protection regime and the best corporate practices in the world, but if they are occurring in a market where there is little or no competition, then consumers will be paying more than they should, and they will be unlikely to experience the benefits of innovation.

Some of our biggest gripes are with markets where, when you look at them from a competition side, there is not enough competition—like banking, energy and telecommunications—so to be good consumer advocates, we also have to be good competition advocates.

But I also think we, as consumer advocates, have a lot to bring to the debate, especially when you think about why competition policy and competition law are important.

The answer to that question is, for us, very clear and it is answered by the object of the Competition and Consumer Act, which is to:

…”enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection.”

The important part of that statement is the opening words: to enhance the welfare of Australians. The promotion of competition and fair-trading and the provision for consumer protection are simply the means through which this is pursued.

This is an important point to pause upon for a moment because consumers tend not to be at the centre of public debate about the competition review.

A lot of the debate to date is about supermarkets, service stations, small business or farmers. But it’s rarely about consumers—they tend to get mentioned as an ‘also-ran’—as a reason why we should care about the interests of supermarkets, service stations, small business or farmers.

And that’s where consumer advocates come in.

Because for the review to be successful, it will take very careful consideration, based on some of the evidence and experience that people in the consumer movement can bring to bear, of the question of what genuine competition looks like for consumers.

The importance of the demand side of competition

One of the key changes since the Hilmer review, to the way we think about markets and competition, has been a greater understanding of the demand side of competition.

The UK’s Office of Fair Trading provides a useful description of efficient, competitive markets, framed in terms of the relationship between supply and demand:

“Markets work well when there are efficient interactions on both the demand (consumer) side and the supply (firm) side. On the demand side, confident consumers activate competition by making well-informed and well-reasoned decisions which reward those firms which best satisfy their needs. On the supply side, vigorous competition provides firms with incentives to deliver what consumers want as efficiently and innovatively as possible. When both sides function well, a virtuous circle is created between consumers and competition.”[1]

Much of the discussion around the forthcoming review, and around competition law generally, has so far focused on the supply side, on the interactions between competitors in the marketplace.

There are obviously important issues here, in particular around market power, the prospect of businesses becoming so dominant that their behaviour is not constrained by competitors or consumers.

But I would argue there has been insufficient emphasis on the demand side, on what it means for consumers to make well-informed, engaged decisions, and what it is that consumers actually want.

As a result we risk distorted outcomes, where an emphasis on the supply side of competition treats consumer preferences almost as an afterthought.

There are some key markets that are critical to day-to-day life, where we would say that there has been insufficient attention paid to the demand side – like the markets I mentioned earlier:

  • banking (though note the debate about competition in financial services will be progressed through the Financial System Inquiry)
  • telecommunications
  • energy

These are all markets where on a first scan of the retail market, there seems to be fierce competition—but when you look a bit closer, that is not reflected in the consumer experience.

A clear example of this is the energy retail market, which in most of Australia has undergone a transition from full regulation to different degrees of contestability.

For two years running, our research shows that rising electricity costs are the number one cost of living concern for Australian households. This is out of all proportion to the actual cost of electricity, when you consider significant expenses like mortgage repayments and rent. But anxiety is high.

In this environment, you might expect consumers would relish the opportunity to shop around, and use their power to extract the best deal for themselves.

To test this, in 2012, CHOICE conducted a nationally representative survey of electricity consumers. We found that:

  • One third of respondents who recently joined their electricity retailer said they had tried to compare providers but had found it was too hard to work out the best choice;
  • Only about half of those who recently joined their electricity retailer were confident they had made the best choice; and
  • 29 per cent said they didn’t bother comparing providers as they are all about the same in terms of what they offer.

This is in a market that—at least in some states—is characterised by high rates of churn—so consumers are making the choice to switch providers but many have no confidence that they are able to make a better choice in the process.

The point here is that vigorous contestability on the supply side is not enough to ensure genuine competition.

We will be asking the inquiry panel to consider the demand side, to think about what is really required for consumers to enjoy the benefits of competition, because it is our view that in many core consumer markets, despite the semblance of competition, consumers are not able to enjoy its benefits, thereby meaning that the object of the Act has not been achieved.

The opportunities presented by data

We think part of the answer lies in taking advantage of the opportunities of data.

Too often, debate about data from the consumer perspective is about the risks of big data—but we have to recognise that there are also benefits—and many consumers are buying and using products and services that rely on rich data to create personalised offers and experiences.

6919015757_5c719ddd15_zNever before has there been so much data potentially available to guide individual decision-making—the only problem is that consumers usually don’t have access to it.

If our objective is to advance competition in complex retail markets, it is increasingly critical to recognise that consumers should have the right to access the data collected about them—about their consumption patterns and the way they interact with their products and services.

The best way to explain this is by again referring to the energy market. We are part-way through the inevitable rollout of smart meters. Most States and Territories have been cautious about this but I have no doubt that at some point in the not too distant future, most Australian households will have a smart meter, following the lead of Victoria.

Smart meters have enormous potential—to help people to understand their household consumption patterns, to understand how to reduce their energy bills through changes in consumption, and most importantly to use this data to choose the best retail energy plan.

But this is not possible outside Victoria—and it only started to become possible there in September 2013—despite consumers having paid for the rollout of smart meters much earlier.

In other states and territories, the best you can hope for is to be able to use your smart meter to compare other energy offers from your current retailer, which does nothing to increase competitive pressure or improve consumer choice.

The UK Government has directly addressed this problem through its ‘midata’ program, which is driving improved consumer access to data in the ‘core’ sectors of energy supply, credit cards, transaction accounts and mobile phones, with the prospect of future interventions in ‘non-core’ sectors if required.[2]

What this means is that consumers have access to their data; they can download it; third parties can develop innovative applications that help consumers to compare products and services, and the information asymmetry between consumers and suppliers in complex markets is reduced significantly.

The markets that the UK Government has identified for this approach are similar to the list I gave earlier—markets that in both the UK and Australia are characterised by sub-optimal levels of competition—which is why we think this is a core issue for the competition review.

Whether midata is the right approach or not, I think the review panel has to grapple with these issues.

The risks of not grappling with data

The other reason the panel needs to grapple with data is that if it doesn’t, data is a risk to competition. One thing that data has done, particularly with the growth of loyalty and reward schemes, is facilitate the growth of diversified businesses that derive competitive advantage from the data on individual consumption patterns that they are able to gather across a range of markets.

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The expansion of the major supermarket chains into fuel has allowed them to put together data on what food you consumer with data on what time of day you fill up your car. This in turn provides an ability to segment the potential customer base for insurance products in ways that other insurers could only dream of.

While they have been caught on the record boasting about this, I suspect that they have not yet put it to full advantage—but if they do, it potentially gives them such a significant competitive advantage that it is a threat to competition in some markets.

One way to respond to this is by giving consumers access to their own data – because this reduces information asymmetry and make sit easier for consumers to go out and select the best product on the market.

Other priorities for the review

In closing, I’d like to touch on a few other issues that are canvassed in the terms of reference that we should be highlighting for the review panel:

  • The interaction between international price discrimination, intellectual property and parallel imports. It is clear that Australians pay more for many goods and services that people in comparable economies. We need to look at this long-term problem through the lens of competition.
  • Protected industries. There are some large industries that are part of day-to-day life and household expenses but that are highly protected. The taxi industry, pharmacies, and some medical specialist professions come to mind. The panel needs to consider whether the levels of protection from competition that incumbents in these industries enjoy are justified in 2014.
  • Small business. Small business is clearly a focus of the review. Taking a purist approach, it doesn’t belong here—competition law is about protecting the competitive process, not protecting any particular competitors. There are valid arguments about the benefits that small businesses (sometimes) bring to competition—particularly in terms of innovation, that at its best creates products and services that better meet consumer needs at lower costs. I don’t think that we should promote these benefits by changing the fundamentals of competition law—but perhaps the answer lies in making it easier for small business to complain safely where they feel they have been victim to anti-competitive conduct.

In summary, the review is and should be important for consumers, so consumer organisations need to engage with the process and I think it is excellent that the members of the review panel have signaled that this is their view, by making time to speak with us this afternoon.

1OFT, ‘What does behavioural economics mean for competition policy?’, March 2010

2See https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/43392/12-1283-midata-government-response-to-2012-consultation.pdf p. 6

Photo credits:

Top: lutmans (cc)
Middle: June Marie (cc)
Lower: r2hox (cc)
Bottom: Dclamstr (cc)

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