Harper Review needs to consider the consumer experience of competition
Where is the voice of the consumer when it comes to opening up markets and enabling greater 'choice'? Following on from Paul Smyth's critique of the Harper Review, @gerardbrody from @consumer_action considers the limitations of competition and market theories as they apply to consumer behaviour, and the distinct lack of voice of consumers in the review.
‘Choice is a powerful dynamic force for improving our lives’ says the Harper Review’s draft report into Competition Policy in Australia, and it is hard to argue otherwise—providing choice recognises our individual freedom. In this light, economist Ian Harper’s thrust of expanding competition principles in the interests of the consumer should be welcomed.
But, in considering consumer welfare in many of our modern markets which were opened up following the previous Hilmer Inquiry into competition, consumers might be forgiven for thinking there is too often an illusion of choice, an illusion that actually limits our freedom.
The draft report released by the Competition Policy Review Panel this week focuses on opening up ‘protected’ industries to competition—pharmacies, taxi services and entertainment content are examples. It also proposes ‘finalising’ competition reforms in industries such as energy and water, where government ownership and restrictive regulation remains. More controversially, the review proposes applying competition principles to social or human services—areas such as aged care, education, and health. Unfortunately, what the report spends less time considering is what effective competition looks like, and which areas of social or economic activity are most appropriate for the application of competition policy.
If competition is truly to be effective in benefiting consumers, we cannot simply establish markets with a contestable supply side and consider the work done. More must be done to ensure markets are effective and responsible, and produce efficient and fair outcomes for consumers.
In our energy markets, which have progressively been opened to competition over the last 15 years, consumers have not consistently benefited. In jostling for consumer’s business, suppliers have typically used sales tactics that take advantage of consumer choice. Door-to-door sales salespeople use high pressure tactics, often engage in deceptive marketing, and make false claims to secure new business. Consumer campaigns such as the Do Not Knock campaign and active enforcement by the Australian Competition and Consumer Commission in recent years have improved practices, but problems remain.
In recent times we’ve seen energy suppliers use contractual trickery to lure consumers into contracts with discounted prices, only to find that the fine print gives the provider the right to increase the price at any time. Locking consumers in to unfair deals in this way limits consumer freedom. More fundamentally, today the most vulnerable are more likely to be disconnected because suppliers aren’t offering adequate assistance to those experiencing bill payment problems, and because regulators haven’t taken them to task. Frighteningly, in today’s energy market, the choice too many consumers are faced with is the choice between heating or eating.
In financial services, the low-income and the vulnerable have also fared poorly from competition. Adopting competition principles, financial services markets in Australia are largely based on the ‘efficient markets hypothesis’. This involves letting the markets do the hard work with minimum regulatory interference. This has led to the expansion of fringe finance such as payday lenders and ‘rent to buy’ providers supposedly fulfilling consumer preferences. Of course, consumer choice here is an illusion, the reason consumers use these products is because they’re shut out of the mainstream market. Further, in order to make a profit, the businesses design products and implement marketing strategies to encourage reliance on their products, debilitating borrowers’ financial wellbeing. The market solution—the payday loan—does not deal with the social problem: that is, the financial stress and difficulty facing an often low-income household. While regulation has come to this sector in the form of responsible lending requirements, the sad truth is that the regulation legitimised this form of lending and legitimised the view that the market can always provide a solution for social ills.
In social or human service ‘markets’, reliance on competition alone may produce similar supplier behaviour and have stark consequences for individual wellbeing and social cohesion. Many such ‘markets’ are already producing consumer detriment. With the opening up of private tertiary education, consumers are increasingly complaining of unfair treatment by private colleges. Concerns raised include that colleges do not have enough teachers for the number of students enrolled or do not provide the promised support. In some instances, poor quality teaching means that students have had to undertake extra training, at their own cost, just to pass the course. More ‘regular’ consumer complaints are common also: unfair treatment, especially in relation to contracts, payments and refunds, as well as high pressure selling. Again, consumer choice in this area is often an illusion—many students are driven by learning requirements imposed to gain access to social security, as much as a desire to improve their education. Too often they can be left without a decent qualification and a hefty debt, payment for which is sometimes pursued by debt collectors.
Professor Paul Smyth suggests its wrong for competition policy to be applied to social services unthinkingly. He suggests there must be much more analysis about the appropriate allocation of responsibilities for welfare as between the state, the market and civil society. The consumer experience in some of markets opened up to competition supports this conclusion.
Where competition principles are applied, consideration must be given to creating the preconditions for effective and informed consumer choice. By only focusing on the existence of contestability between suppliers, we risk embedding irresponsible market practices and poor consumer outcomes. Economists such as Ian Harper and his colleagues should be concerned about this too—markets that are irresponsible and ineffective in this way are unlikely to be efficient. If choice is to improve our lives, it is important that in its Final Report, the Harper Review consider the consumer experience of competitive markets, not just the existence of competition.