CCP Seminar: Challenging Criminalisation

We are delighted to be able to welcome Debra Wilson (University of Canterbury, NZ) as our guest this week. She will be presenting at the CCP seminar on Friday 30th November, where she will discuss her research on ‘Challenging criminalisation: Why cartel conduct does not warrant its priority for criminal sanction in competition law‘. A copy of Debra’s abstract can be found below.

Abstract

Statements that label cartels as ‘the supreme evil’ of competition law are commonly cited in any discussion on cartel regulation. If we accept such statements as being accurate, then criminalisation of cartels is an appropriate, even necessary and desirable, step. Criminalisation sends a clear message that society does not tolerate such conduct. But in order to accept such statements, we must be convinced that they are accurate, and not mere rhetoric used either to justify adopting laws in order to remain consistent with other jurisdictions, or simply language repeated so many times that its accuracy has ceased to be questioned.

 This presentation seeks to examine the ‘presumably noncontroversial’ position that cartels are the supreme evil of competition law, and thus deserving of criminal sanction. In a time when increasing numbers of countries are following the lead of the USA and introducing criminal penalties for cartel conduct, and some are preparing to test their provisions for the first time, it is important to ensure that these penalties are justified, and aimed at addressing the real  ‘supreme evil’ of competition law. It will reconsider the harm caused by cartels, and suggest that it is not the forming of the cartel itself which should be the target of criminal sanctions, but the actions of the cartel once formed, in using its new market power in a manner that is anti-competitive. As such, it can more correctly be seen that it is the abuse of dominance that is in fact the supreme evil, and therefore the appropriate target of criminal sanctions.

What happens if consumers do not pay attention?

The policy brief we posted last week was also put out as a press release (below). Further to that, Prof Daniel Zizzo will present a lecture based on the research today (Monday November 26). Entitled ‘What happens if consumers do not pay attention?‘, it will consider how the liberalization of the market for services such as electricity and gas has resulted in few consumers shopping around for better deals. The lecture is free to attend and takes place at 6pm in Lecture Theatre Arts 01.02, UEA, Norwich

Consumers should be ‘nudged’ into action in order to get the best energy deals according to new research published today by the University of East Anglia.

The study also found that simplifying the number of energy products on offer does not necessarily help householders get the best deal.

The findings come just days after the government announced plans to force energy companies to reduce the number of tariffs they offer and place their customers on the cheapest one.

According to the study, consumers are likely to stick to their existing ‘default’ tariffs, even though they are not the cheapest, because they do not pay enough attention to the task of finding a better deal.

However, a ‘smart nudge’ policy of automatically switching default tariffs to the best one at regular intervals would address the problem of consumer inattention and inactivity, and achieve better results for consumers while leaving them free to choose an alternative tariff if they wish to. Reducing the number of tariffs to as few as four in the market – a more drastic reduction than that proposed by the government – was found to improve the results for consumers, but when the problem of customer inattention was taken into account, even such a severe reduction only partially helped.

On Tuesday Energy Secretary Ed Davey said firms would only be able to offer four core tariffs for both gas and electricity as part of government plans to get customers a better deal on energy. Customers would also be moved on to their best deals automatically, something Prime Minister David Cameron promised in a surprise announcement last month. Industry watchdog Ofgem had also announced plans to force suppliers to tell customers about the cheapest gas and electricity tariffs they have on offer.

Prof Daniel Zizzo, Dr Stefania Sitzia and Jiwei Zheng, of UEA’s School of Economics, suggest that the government should consider the feasibility of a smart nudge where consumers would be switched to the best deal at regular intervals unless they choose otherwise. Their smart nudge solution, while coming closest to David Cameron’s, is more radical and is likely to create greater competitive pressure between the companies.

The study Complexity and Smart Nudges with Inattentive Consumers, published by the ESRC Centre for Competition Policy at UEA, found a significant proportion of people get a poor deal either because of sticking to their existing ‘default’ option or because of switching to a bad option. Even with the presence of a search engine to help them, consumers are likely to stick to defaults and achieve worse deals.

Prof Zizzo said: “Tariff complexity and the number of tariffs matter, but inattention matters as well. In order for consumers to reap benefits from competition in service markets, they have to be actively engaged in spotting the best deal that is available to them. The reason why reducing the number of tariffs, and therefore the complexity of the task, solves the consumer inertia problem only partially is because customers do not pay enough attention to the task in the first place and as a result just stick to the default option.

 “We suspect that time-constrained consumers may simply not pay attention to tasks regarding the choice of services. It may not be in their minds in the way in which saving money at a supermarket buying groceries is. And unlike the regular grocery shop, there is a not a point in time in the day, the week, the month or even the year where, as a routine, people are required to pay attention to the task of choosing energy supplier, as there is always a default supplier.

“Regulatory measures to reduce complexity are, therefore, likely to be of only partial value. A crucial issue from a policy viewpoint is to consider how to raise consumer attention or otherwise deal with consumer inattention.”

The researchers studied the UK gas and electricity retail markets to explore the psychological motivations affecting consumer behaviour. Using a series of experiments, involving 460 participants, they tried to identify whether customers are likely to stick to their default tariffs and so achieve a poor deal, why they do this, and what can be done about it.

They also tested the effect of complexity – in terms of tariff structure, number of tariffs and the bundled nature of products – and the impact of inattention on consumer behaviour.

Prof Zizzo added: “We show that by using a ‘smart nudge’ which automatically identifies the best tariff and uses this as the default choice, and making the power of default work for instead against consumer welfare, we can obtain the best outcome around 85% of the time.”

Another smart nudge tested by the researchers was simple awareness-raising, by which participants were advised of the existence of a better tariff when they had made a worse choice. However, they found a generic warning that a better energy tariff exists in the market does not help consumer choice.

Participants in the experiments took the role of consumers deciding on tariffs, where a financial loss was incurred if they did not choose the best tariff.

While the study focused on the UK electricity and gas markets, the authors suggest the lessons drawn from it are likely to be more general and could apply to other service markets where choice is possible, such as internet services, bank accounts and mobile phone contracts.

Policy Brief: Complexity and Smart Nudges with Inattentive Consumers

Complexity and Smart Nudges with Inattentive Consumers

BACKGROUND

In a number of service markets where choice is possible, it has been observed that many consumers do not switch service providers even though the tariffs they are holding are suboptimal. Moreover, when choice is exercised, chosen tariffs are not always optimal.

The service markets at issue include: bank accounts, mobile telephony, internet services, consumer gas and electricity services, fixed telephony and multichannel TV services.

METHODOLOGY

• The authors draw on stylised features of UK gas and electricity retail markets to explore the psychological motivations to consumer behaviour.

• Through a series of experiments the authors seek to identify whether consumers are likely to stick to default options and achieve suboptimal outcomes, why they do this, and what can be done about it.

• Participants in the experiments took the role of consumers deciding upon tariffs, where a financial loss was incurred in the event that the best tariff was not chosen.

• The authors focus on the role of complexity and the part played by inattention in behaviour.

• Three forms of complexity are considered:

• the complexity arising from bundling two goods together, as in dual-fuel tariffs;

• complexity in the structure of tariffs; and

• complexity in the number of tariffs.

KEY FINDINGS

• Poor outcomes are realised by a significant proportion of people, either because of sticking to the default option or because of switching to a bad option.

• The complexity of the choice problem is found to matter. In particular, a reduction in the number of tariffs from 24 to 4 is found to improve consumer outcomes.

• However, the role of complexity in poor outcomes is overstated if the explanatory power of inattention is neglected: subjects who do not pay enough attention to the task in the first place tend to stick to the default option.

• By using ‘smart nudges’ and making the default option work for (instead of against) consumer welfare, optimal outcomes can be obtained approximately 85% of the time.

POLICY ISSUES

Simplification of the choice problem may help with the problem posed by complexity but does not help with the problem posed by consumer inattention.

A generic warning that a better energy tariff exists in the market does not help consumer choice. However, more research is needed on more tailored warnings.

A ‘smart nudge’ solution can be used to exploit consumer inertia grounded in inattention: when consumers are automatically switched to the best default energy tariff, better consumer outcomes can be achieved while leaving consumers free to choose an alternative tariff if they so wish.

ABOUT THE AUTHORS

Daniel Zizzo is Professor of Economics, Head of the School of Economics and Associate Dean (Research) for the Faculty of Social Sciences at UEA and a Faculty member of CCP, Stefania Sitzia is Lecturer in Economics at UEA and Jiwei Zheng is a PhD research student in Economics at UEA and a student member of CCP

CCP Seminar: Timing in Broadcasting Advertising

The CCP’s weekly seminar series continues on Friday 23rd November with our resident post doctoral research fellow Anna Rita Bennato (CCP) presenting her research into ‘Timing in Broadcasting Advertising‘ which she is carrying out collaboratively with Berardino Cesi and Alberto Iozzi of the “Tor Vergata” University of Rome. A copy of her abstract can be found below.

Abstract

We develop a model of competing platforms by which we aim to study the welfare loss resulting from a timing game between TV channels, which define their optimal advertisement allocation in their programmes. The goal of this analysis is to pin down how the regulatory restrictions condition the strategies of the broadcasting industry. In particular, we incorporate the bargaining process between channels and advertisers who, being multi-homing, are able to sign contracts with more than one TV channel, advertising their commercials simultaneously on different channels.

Commodity Market Dynamics and the Joint Executive Committee (1880-1886)

Franco Mariuzzo (together with his joint author Patrick Paul Walsh) has had Commodity Market Dynamics and the Joint Executive Committee (1880-1886) accepted for publication in The Review of Economics and Statistics.

Commodity Market Dynamics and the Joint Executive Committee (1880-1886)

Abstract

Using weekly spot and future commodity prices in Chicago and New York, we construct expected transportation rates for grain between these two cities, expected inventory levels in New York, and realized errors in the expectations of such variables. We incorporate these exogenous commodity market dynamics into Porter’s (1983) structural modeling of the Joint Executive Committee Railroad Cartel. As in Porter, we model marginal cost as a parametric function of (instrumented) output, among other factors. Unlike Porter, we model pricing over marginal cost as a nonparametric function of a set of variables, which include expectations of deterministic demand cycles and Cartel stability. We estimate the pricing and demand equation simultaneously and semi-parametrically. Our estimated weekly mark-ups during periods of Cartel stability are shown to reect optimal collusive pricing over deterministic business cycles, as modeled in Haltiwanger and Harrington (1991). Periods of Cartel instability are proven to be triggered by realized mistakes in expectations of New York grain prices.

CCP Seminar: ‘Incentives or Institutions: What Determines the Duration of E.C. Cartels?’

On Friday 9th November, the CCP’s weekly seminar series continues with our very own Richard Havell (ECO) presenting his research entitled ‘Incentives or Institutions: What Determines the Duration of E.C. Cartels?’ A copy of his abstract can be found below.

Abstract

The theory of incomplete cartels identifies several characteristics such as discount rate, costs and capacity which dictate which firms will be members of a cartel and which non-members. Any entry to a cartel must involve the outsider firm which is most similar to the member firms. This firm will then become the first firm to leave the cartel. A dataset of 482 firms’ membership in 91 cartels prosecuted by the E.C. between 2001 and 2011 is analysed using a logit model predicting a firm’s exit from an active cartel with their entry into an already established cartel. It is found that firms indeed are more likely to exit a cartel early if they entered that cartel late and if the cartel in question is large.

What firms joining or leaving a cartel signals about that cartel is ambiguous. A cartel with a membership which does not change over time may have strong institutions and disciplined members or it may be fragile and would break down with entry or exit. Similarly, a cartel with a highly variable membership may be unable to maintain its agreements or it may be successful, thus attracting entrants, or structurally sound, thus inducing members to defect to the fringe. The durations of the same group of cartels is analysed using three Cox survival models and it is found that cartels which experience entry and exit over their duration tend to survive for longer than those with less variable membership.

From Gigs to Giggs: politics, law and live music

Each month we collect up and record all the outputs made by CCP members. To give people an idea of the scope of the research we undertake we are going to be publishing the abstracts and links to papers written by our colleagues in the Centre.

John Street has published “From Gigs to Giggs: politics, law and live music” in Social Semiotics.

From Gigs to Giggs: politics, law and live music

Abstract

This paper explores what it means to talk of live music as a right. It does so by looking at the ways in which courts and other actors constitute music as a political entity to which such rights might be attached. It considers two case studies. The first is the cancellation of a tour by the UK grime artist Giggs; the second is the merger of Live Nation and Ticketmaster. Drawing upon the work of Paul Chevigny, the article argues that in both instances we can see music being constituted as “political”, where this entails the recognition or denial of particular rights claims.

Visitors from far and wide

In the run-up to the end of the Semester the Centre is going to be very busy. Our visitor programme is packed:

1. Sumit Majumdar, Professor of Technology Strategy, University of Texas at Dallas will give an ad hoc seminar in CCP on Wednesday 14th November at 11:30 “Mergers and Network Pricing: Evaluating Access Revenue Patterns of Incumbent Telecommunications Firms”.

2. Chris Wilson, a CCP alumnus, now at Loughborough, is visiting the Centre from noon on Thursday 15th to end of Friday 16th November. Read more of this post

Vacancy: Post Doctoral Research Fellow

We are seeking a Post Doctoral Fellow with demonstrated research potential, who wishes to develop an academic career. The position would suit a candidate who has recently finished their PhD or a candidate looking to pursue a specific research project.

Candidates must have submitted their thesis for a doctoral degree prior to their appointment, or have been awarded a doctoral degree within the past four years and satisfy all other essential criteria in the person specification.

This full-time post is available fixed term for 1 year with effect from 1 January 2013. You can find out more and apply here.