Sometimes, a spot of collusion can be a very good thing
Many companies now penalise rather than reward loyalty
The car hire company quoted a low price, only to reveal at the desk that compulsory extras added about 60 per cent.
I was travelling abroad last week. The car hire company quoted a low price, only to reveal at the desk that compulsory extras added about 60 per cent. My aggravation was increased by the airport hotel. Its free shuttle swept you rapidly from the terminal to reception. Only then did the hotel reveal that there was a charge to take the shuttle back to
The car hire assistant, genuinely helpful, pointed out that the vehicle was probably available more cheaply at the desk of one of her company’s competitors. But the company knows few people arriving late at an airport will be inclined to shop around. That is why the online price for advance bookings – where there is easy comparison and vigorous competition – is typically much lower than the walk-up price. Similarly, the hotel knows that few people, however angry, will walk back to the terminal carrying their luggage.
All this was before the hire company tried to add ridiculously overpriced insurance. And before the hotel charged €20 for a coffee and croissant in the morning. Travellers have always been resigned to being ripped off. There is a premium to be paid for buying things in an unfamiliar environment that you will probably not visit again.
But the problem – which I am inclined to describe as petty fraud – is no longer experienced only by those who are passing through. Most insurance companies now penalise rather than reward your loyalty. They charge existing customers more than new ones. Printers are cheap to buy but consumables are extremely expensive. To assemble a car from individually purchased spare parts would cost many times the price of the complete vehicle.
Paying more than expected
Modern life involves complex and multidimensional products. It is perhaps inevitable that price structures appear similarly complex and multidimensional. The consumer has neither capacity nor time to devote attention to the detail of these tariffs. The producer has every incentive to do so. The result is that consumers end up paying more than they expected or intended.
The profuse availability of information online may have made the problem worse. Businesses aim to achieve top ranking on a comparator site. That is how I chose the car hire company – and the assistant at the desk was well accustomed to customers who felt cheated but purchased anyway.
Once, market forces and the power of brands and reputation provided reassurance. Many businesses took a long-term view and valued their customers’ loyalty. But a more opportunistic outlook on the part of big companies means that, in many markets, reputations have fallen so low that consumers expect nothing and get little. All the petty frauds I have described were perpetrated by well-known companies. In these circumstances, competition is no longer the answer to the problem of tariff complexity but a means of spreading the practice of petty fraud. The company that offers a fair price loses business to the company that provides the misleading tariff.
In the UK, payment protection insurance involved marketing policies to bank borrowers and credit card users that were unlikely to pay out much, if anything. The abuse was dealt with by the Competition Commission (significantly, the Financial Services Authority came to the issue only late in the game). Yet it was not the absence of competition but its effectiveness that was the essence of the problem.
The chance to earn profits from insurance led to aggressive pricing of the associated loans, forcing them to levels at which the core activity was barely profitable. Banks had to sell these useless products to stay in the lending business even if more thoughtful executives (there were some) wanted to refrain.
Similarly, my car rental company could not have made economic sense of the rate it quoted. But its tactics put pressure on others to appear to match its prices. Once such behaviour becomes general, it is no longer possible for companies to compete honestly. Paradoxically, businesses and the public would be better served if there were an (illegal) agreement to collude.
Tariff opacity is today the biggest concern in consumer protection – and the principal challenge facing the Competition and Markets Authority in the UK, which begins operations next year. Dealing with it requires a fundamental rethinking of our understanding of competition. – (Copyright The Financial Times Limited 2013)