Sunday, April 16, 2006

Confusion as a screening device

In Slate, Tim Harford recounts his difficulties in choosing a mobile phone plan. Faced with a confusing set of options, he finally rings his current provider and they tell him what the best plan for him is. His thought: they put too many options in their catalog so as to screen customers based on whether they have time to call them for the 'right' choice or not.

The question is whether this argument makes sense. One issue is whether calling-in is the option that costs the most in time. Harford's implicit idea is that those who do not have the time will randomly choose a plan and end up paying too much. Those who do, will call-in and pay less. In that way, the phone company screens for those who have "money to burn."

This theory, however, depends on several things. First, that those who do not call-in indeed have money to burn. It seems to me that if you wanted to exploit this, you would want to provide a simple but high price option that can be purchased easily rather than an array of choices that are hard to sort out. Second, even if this were the case, it would have to be actually harder to call-in rather than choose a plan from a catalog. The reverse could easily be the case. Finally, those who were frugal would have to understand and trust the calling-in option.

On this latter point, my own experience with choosing gas and electricity plans stands in sharp contrast. In preparing for a presentation at an ACCC conference last year, I decided to see how much competition amongst energy retailers had got us. I rang up all the main incumbents (including my own provider) and tried to compare the plans. The task was incredibly difficult. Some plans were based on monthly consumption, others bi-monthly. Some had the prices stated ex. GST and others including GST. And there was more. I put it into a spreadsheet and what did I find? They were all exactly the same! Hours of work for nothing. They were all the same and at their regulated cap.

In the end, I rang my current provider and threatened to switch to an alternative. They offered me what amounted to a 2% discount for the next year -- a saving of $22 in total. Not much reward for the effort of working out what to do. Moreover, that 2% was disappear next year as it was really just the X in the CPI-X regulated pricing formula.

I saved people at the conference the time of searching but also identified a real source of screening: those willing to call-in were those who had demonstrated a willingness to switch. These are exactly the people you want to give a discount to.

All this doesn't explain the mobile phone confusopoly where the prices are different. Thinking more about that is something I'll leave for a future blog.


vee said...

Ross Gittins did a similar piece on Choice. You may still be able to find his op-ed online. Basically he said too much choice and u'll take the cheapest sounding choice as opposed to the choice that is right for you because it is too time consuming. Whereas when Choice was limited, you'll make the best quality choice out of the options that suit your needs.

Anonymous said...

The Slate option wouldn't work for mobile phone plans in Australia. I had to buy two phones when we returned from the US to Oz in 2004, and spent a bewildered week trying to pick them. All the advice I got from sales reps was bad. I think many of them are confused too.....