The impact of consumer protection on competition and competition law The case of deregulated markets 22 March 2007 Dr. Kati Cseres Amsterdam Center for Law and Economics, Amsterdam Center for International Law Universiteit van Amsterdam

Overview

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The regulatory function of law in the liberalization process The interplay between consumer protection and competition law Two case studies, two phases of liberalization ƒ Liberalization of the Hungarian telecommunications market ƒ Liberalization of the Dutch electricity market Focus: information problems and consumer behaviour Policy questions Remedies

Liberalisation of markets „ „ „ „

opening up “old” markets to competition or creating new markets consumers can exercise their choice for the first time deregulation and introducing competition maintaining competition ƒ

competition law tools ƒ specific sector regulation ƒ do consumer information problems play a role? ƒ no: market supplies necessary information ƒ yes: imperfect information may effect competition

The regulatory function of law in the liberalization process „ „ „

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Outsourcing the enforcement of the law to private individuals Increased role of private actors in the public sphere Use of private law and other means (information disclosures, economic incentives) to correct market failures Liberalization and deregulation: with or without regulation?

The interplay between consumer protection and competition law „ „

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When markets fail to work effectively we turn to competition law and consumer protection Non-competitive market outcomes can have many reasons: ƒ bad regulation ƒ bad law enforcement ƒ insufficient consumer activity Looking for borderlines: what are the specific reasons to tackle a certain market failure on the supplier or on the consumer side? How do consumer protection rules addressing information failures effect competition and the enforcement of competition rules?

The interplay between consumer protection and competition law „

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focus of competition law: market failures originating from collusive or exclusionary practices ƒ maintaining availability of consumer choice, lower prices ƒ serious consumer problems may arise even in competitive markets focus of consumer “protection”/ empowerment: information failures ƒ imperfect information, information asymmetries ƒ good quality and cost of information ƒ psychology of consumer decision-making ƒ rationality - bounded rationality

The interplay between consumer behaviour and competition in deregulated markets: switching „ „ „ „

To what extent does consumer switching act “as a competitive constraint”? What is the relationship between consumer switching and the competitiveness of the market? Is a market competitive even when only a low percentage of consumers switch? Switching costs: financial, time – related, psychological (learning, uncertainty) ƒ Costs for consumers but also for firms!

The role of switching costs

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a dilemma for firms: low prices for new customers OR high prices exploit captured customers new or old markets, initial period or later period, can firms discriminate among customers? they can lead to or strengthen market power over existing customers, price wars for future market shares and future customers they generally raise prices and create welfare losses Klemperer (1995) a barrier of consumer activity: actual and perceived search and switch costs Giulietti, Waddams Price, Waterson (2005)

Hungarian telecommunications market „

fixed line telephone market: strong incumbent competition is not yet present as a result of bad regulation ƒ ƒ

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mobile telephone market ƒ ƒ ƒ

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several cases of abuse of dominance by incumbent, Magyar Telekom (80%) but also misleading consumers

competition has been fierce from the beginning intensive marketing practices lead to unfair commercial practices advertisement war: misleading consumers

consumers have: choice and lower prices (weak price competition) consumers do not have: objective and transparent information, no awareness of switching, redress problems

Studies on the practice of Hungarian telephone customers 2004

Switching/ not switching

Reasons

mobile telephone customers switched

19%

lower minute tariff

fixed-line telephone customers

80% still with Magyar Telekom

37.9% not aware of switching

fixed-line telephone customers

28.3% thought switching was not possible

January 2007: similar since 2001

Fixed service providers’ share based on the main lines: 2006 Fixed service providers' share based on the main lines, 2Q 2006 (only own infrastructure, in case of alternative service providers)

Monortel 2% Hungarotel Emitel 2% 4% Invitel 11%

Alternatives 4%

Magyar Telekom 77%

Dutch electricity market

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demand side of the market has been liberalised in four steps last step: full liberalisation 1 July 2004 Energy Act 1998: Article 5 ƒ Promotion of energy market: non-discriminatory, transparent, real competition, effective market functioning increased number of suppliers small consumers have free choice of supplier prices are not regulated

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“you

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are stealing from yourself if you don’t switch”

“Consumer switching in the electricity market is modest” New electricity supplier since 1 July 2004

Reasons

switched

14 % (+ green energy 16%)

lower tariff Contract terms Services

considers switching

10%

Price, more favourable conditions of the supplier

Not at all

40%

Benefits unclear, market instable, little information available

Information problems and consumer behaviour „

Problems: ƒ administrative problems with processing switching ƒ bills are unclear ƒ Unfair and misleading acquisition of customers ƒ high switching costs (problems have been partly dealt with) ƒ Market is intransparent lack of comparative information: “tips and tools” ƒ price comparisons are not objective ƒ Complaints procedures unsatisfactory ƒ possible savings from switching are limited

Remedies „ „ „

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transparency of information prices decrease time and ease of switching for consumers NL market monitoring: ƒ Scoreboard monitoring firm behaviour and performance ƒ self-regulatory codes of conduct on acquisition and retention of customers ƒ Information code streamlining information exchange ƒ BUT we need to know more about expected consumer behaviour how to deal with psychological hurdles? ƒ motivation, capacity, opportunity ƒ rationality, irrationality, bounded rationality?

Implications for policy and lawmaking „ „ „ „ „ „ „

What kind of information, analytical tools and methodologies to ensure consumer interests Should we intervene and how to intervene? More mandatory information disclosure, control advertising, standard contracts, price comparisons? Paternalistic guidance towards certain options through framing the way information is provided? Reduces consumer choice, increases burden on firms Intervention when there is risk of consumer harm or when there is clear evidence of it? “Regulation imposed with a lighter hand”

Further questions

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How do information asymmetries impact notions of efficiency and competition? Do they change the point at which competition law is triggered? What is an efficient balance between interventionist rules of consumer protection and competition law? institutional questions: are there synergies from handling both supply and demand side problems under one agency?

Distribution of the subscriptions among the service providers

Q4 2001

Q3 2004

T-Mobile (Magyar Telekom)

50.65 %

45.13 %

Pannon GSM

39. 66 %

33.95 %

Vodafone

9.69 %

20.92%

Fixed service providers’ share based on the main lines

Q1 2002

Q1 2005

Magyar Telekom (MATÁV), Emitel

79 % + 2 %

80 % + 2%

Hungarotel

5%

5%

Invitel (Vivendi)

12 %

11 %

Monortel

2%

2%