Telecommunications Consumers: A Behavioral Economic Analysis

Article excerpt

Abstract

This article offers a commentary on consumer behavior in modern telecommunications markets, based on advances in behavioral economics. An original analysis of the decision-making environment faced by telecommunications consumers identifies four specific properties of the market, of which rapid technological change is just one. The core argument is that this combination of properties, which is unique to telecommunications, is likely to foment decision-making biases established by behavioral economics. This central insight is used to address two issues of concern from a pro-consumer perspective: low levels of switching between providers and failure to select optimum tariffs. Competing explanations for low switching and accumulating evidence of consumer detriment in tariff choice are outlined. The commentary concludes by considering ways that consumers might be helped to meet the challenges identified.

It is no exaggeration to state that consumers' response to the liberalization of a range of formerly state-run markets, including networked utilities and telecommunications, has surprised economists and policymakers. In theory, the opening up of these markets to competition allows consumers to be active in choosing the best and lowest cost suppliers, producing upward pressure on quality, downward pressure on prices and an overall increase in consumer benefit and economic efficiency. To some extent this has happened. Choice has expanded and many consumers have switched suppliers to obtain better value. What has surprised, however, is the degree to which consumer behavior has departed from this ideal competitive model. To take a simple example, research in energy markets has revealed large numbers of consumers failing to switch to lower cost suppliers (e.g., Brennan 2007; Giulietti, Waddams Price, and Waterson 2005). Moreover, in a recent sample of British consumers, the majority who switched electricity supplier to make savings failed to select the best available deal, while a substantial minority actually managed to increase their bills (Wilson and Waddams Price 2010).

Explanations for such phenomena are increasingly sought in behavioral economics, which has documented a range of "biases" consisting of systematic departures from the rational choice assumptions of orthodox microeconomics (for reviews see DellaVigna 2009; Rabin 1998). Because behavioral economics is a relatively new sub-discipline with a broad and rapidly moving scientific frontier, the precise implications for consumer policy are as yet hard to determine. Yet, there is already widespread agreement that such implications may be important (Garces 2010; Micklitz, Reisch, and Hagen 2011; Rosch 2010) and, moreover, that policymakers, regulators and consumer groups need to recognize the possibility that behavioral biases cause considerable consumer detriment (Bennett et al. 2010; Lunn and Lyons 2010). If so, there may be scope for devising new interventions to protect consumers (Faure and Luth 2011).

This article addresses these issues in the specific context of the modern consumer telecommunications market. The core argument is that this consumer decision-making environment is unique and, as a consequence, likely to foment particularly strong behavioral biases. Thus, the article shares its motivation with other work that has aimed to highlight markets where biases might be especially prominent and policymakers (and others) may need to pay particular attention, such as financial services (Barr, Mullainathan, and Shafir 2008), health insurance (Liebman and Zeckhauser 2008) and insurance generally (Schwarez 2010). The analysis aims to be useful to anyone concerned with improving the experience of telecommunications consumers.

The digital revolution offers opportunities for communication and entertainment that previous generations would doubtless have envied. Nothing that follows is intended to suggest that the overall benefits of these developments are not very large. …