Andrew Fawcett: Flick the switch

Competition law expert Andrew Fawcett

Opinion

Consumers reap benefits from competitive pressure, so why are so many of us staying with our current suppliers without even investigating what competitors offer for the same service?

Consumers benefit from increased competition between suppliers, in terms of lower prices or higher-quality services.

Many of us can recall what airport terminals in this country were like before domestic airline competition, and the week-long wait to have a telephone landline connected after moving into a new house before there was competition between telecommunications service providers.

Strong competition plays an important role in economic growth, and a growing economy would be nice right now.

So, what are you doing as a consumer to support competition?

Have you switched service providers recently? If not, have you looked at what other service providers charge for the same service?

Economists and marketers recognise the strategic element to consumers' changing of suppliers, known as "switching barriers" or "switching costs". These terms are generally described as costs that deter consumers switching to a competitor's product or service.

These costs can be tangible, such as exit fees or loyalty rewards.

Other costs which should not be underestimated are intangible psychological, emotional or social costs. For example, before consumers had the ability to keep the same phone number when they switched phone companies, the effort needed to inform friends and relatives about a new telephone number was seen as a significant barrier to switching.

Consumers grow accustomed to a certain product or service's features, and its brand, as well as the company that provides it. Once a consumer is satisfied and set in their ways, they apply higher switching costs to moving to another supplier. I believe my parents watch a channel other than TV One solely because Sky is the only outlet to televise live rugby.

The phenomenon of switching barriers or switching costs very much affects competition. While it is rational for a consumer faced with switching costs to choose not to switch supplier, what if the perceived switching costs or switching barriers are not rational? It makes no sense at all, when weighed against the benefits to consumers from increased competition, that a consumer's simple sensitivity to any change from the status quo can be a barrier to switching to a lower-cost, improved product or service.

There are useful tools readily available to consumers which remove search costs associated with switching suppliers. For example, Consumer NZ's
Powerswitch allows you to work out which retail power company and pricing plan is best for your household, and is supported by the Ministry of Consumer Affairs.

You can also compare your internet service provider's price and performance to other ISPs in your area by downloading customer experience monitor Epitiro's free 'Isposure' testing tool. The first performance figures released by Epitoro have Orcon and Slingshot topping the performance ratings.

The mobile telecommunications market is currently seeing a lot of activity by service providers to attract consumers away from their current suppliers. This is good, because increased competition is needed in the mobile market in New Zealand.

Mobile calling volumes in New Zealand are low by international standards, making up only one quarter of the total calling amounts compared to at least one third to one half in comparable countries.

Vodafone New Zealand Limited is currently New Zealand's largest mobile telephone operator with just over 50 per cent of the market share, while Telecom has just under 50 per cent.

Vodafone should be recognised for its success in New Zealand, as it acquired its New Zealand business in 1998 from BellSouth and New Zealand is one of the few countries where the former state-owned incumbent (that is, Telecom New Zealand) is not the largest provider.

Vodafone has been operating a 3G network in New Zealand since 2005. Telecom has only recently launched its own 3G network, the XT Mobile Network. Also, 2 Degrees, a third mobile carrier, now has begun operating.

What this means is that for the first-time consumers with one handset can use the competing networks merely by changing the SIM card, making switching easier and less costly.

Unless you are contractually locked in to your current supplier for electricity, broadband, mobile telecommunications or other services, shouldn't you consider the real reasons you are choosing to lock yourself in to that supplier, and at least explore what benefit you could gain by switching to a competing supplier? Even if it turns out that the plan you are currently on is the best for you, doesn't it make sense to confirm that?

* Andrew Fawcett is a principal at Lowndes Associates specialising in TMT and Competition Law.