Today in the Fairfax papers the CEO of Medibank Private complains that comparison sites just end up adding costs to consumers.
Australia’s biggest health insurer, Medibank Private, and largest insurance broker, iSelect, have engaged in a brawl over fees charged by comparison sites as both companies prepare for potential public listings.Medibank Private, which has 3.7 million members, said the growth of comparison sites – which recommend and sell policies for a commission – have led to higher premiums. Its managing director, George Savvides, said the costs of $800 commissions paid to the sites and an industry-wide surge in advertising costs were ultimately borne by policyholders.See the rest of the story
But not so fast.
Insurers and other companies that sell complex products hate comparison sites. They limit the company’s ability to pull the wool over customers’ eyes. Consumers want to know what is on offer and what it will cost them. But insurers, phone companies and energy providers work as hard as they can to confuse them with complex product conditions, bundles, pricing plans and tariff structures.
Scott Adams – famous for the Dilbert cartoon series – has labelled markets like this a ‘confusopoly’: “a group of companies with similar products who intentionally confuse customers instead of competing on price.” Economist Joshua Gans has taken up the notion (see for example The Road to Confusopoly and Breaking up the Retail Price Confusopoly).
No wonder we have seen comparison sites take off in recent years. There are at least several options in each market in Australia – comparing phone plans, energy products and financial service products. In the UK and New Zealand consumer organisations have also entered the fray, with the New Zealand Consumer organisation’s TelMe and Consumer PowerSwitch sites providing great information for consumers with no commission payments to companies.
Comparison sites have limitations. The confusopolists – the energy companies, telcos, insurers, banks etc – don’t want to cooperate. They can make it harder (but usually not impossible) to get the information needed to provide consumers with a fair comparison. Consumers are not always confident that a comparison site is transparent, treats all offers equally, and is just basically correct. Research by CFA member Consumer Utilities Advocacy Centre on energy switching sites exposes some of these problems.
And, importantly for the business objectives of the commercial comparison sites, the confusolopists don’t have to agree to pay a commission. Only some retailers will do so, and only for some products (those that look good in some comparisons).
But done well comparison sites can add value. In January this year Harvard Business Review published Smarter Information, Smarter Consumers by Professor Richard Thaler – co-author of Nudge – and Will Tucker. Thaler and Tucker advocate policies that would both reduce the cost of operating comparison sites and make them more useful to the consumer. There are three outcomes that would need to be achieved to benefit consumers:
1. all companies in a market release in machine readable form all relevant data about product features and pricing plans
2. all companies are obliged to provide to any customer who asks information about the customer’s own usage of a service such as an energy or telco plan. The consumer would use this information to get a better, more accurate result from a comparison site, rather than as now relying on their possibly incomplete or inaccurate estimate of their usage over time.
3. safeguards against mis-use of private information.
These changes would bring down the cost of running a comparison site and significantly increase the accuracy of information provided to consumers. The result would be incentives for companies to compete on value for money rather than gimmicks. They may also improve the cost/benefit case for public funding of accurate and comprehensive comparisons sites – which would increase overall consumer welfare by enhancing competition.