1. IMPACT ESTIMATION PROJECT What do policy-makers need from behavioural economists? Dr Amelia Fletcher Chief Economist UK Office of Fair Trading DGSanco Conference 28 November 2008 (The views expressed here are my own and not necessarily those of the OFT)

2. Background ● OFT’s mission:  “Making markets work well for consumers”  Good for consumers and productivity ● Involves joint application of competition and consumer policy:  Exploiting synergies  Avoiding tensions ● Focus today on consumer policy

3. Consumer / competition nexus Trust in firms and markets Firms compete fairly to win business from each other Consumers can and do purchase what is best for them

4. Three key aims for consumer policy 1. Activate consumers 3. Increase consumer confidence 2. Protect consumers Encourage suppliers to compete Encourage suppliers to honour promises Increase market demand But how to achieve this most effectively? And how to avoid unintended consequences?

5. Improving consumer decision-making 1. Access relevant information 3. Act on it (or not!) 2. Assess it Behavioural biases Inertia Access complexities Limited memory Behavioural biases Myopia Over-confidence Framing/anchoring Choice overload Calculation inability Behavioural biases Inertia Lack of self-control

6. The role of consumer tools 1. Access relevant information 3. Act on it 2. Assess it Improve transparency Facilitate processing of information Facilitate switching Misleading practices regs Disclosure rules Cancellation rights Customer porting rules Cooling off periods Unfair contract terms regs

7. Consumer policy as protector ● Firms often expert in behavioural economics! ● Key question: When (and when not) to act? Anchoring?Over-confidence? Inertia?

8. Issues for behavioural economists 1 ● How effective are the tools in achieving their aims? For example:  Does BE help us distinguish statements that are misleading from those that are not?  Does BE help us assess whether/when cooling off periods will enable better decision-making? Or how long they should be?  Does BE help us assess whether disclosure rules aid decision-making? ● Are there gaps in the current consumer toolkit?

9. Issues for behavioural economists 2 ● What are the unintended consequences of consumer policy tools?  preventing consumers from learning?  preventing market solutions from emerging?  preventing efficient ‘nudging’  encouraging inappropriate risk-taking?  preventing well-judged risk-taking?  restricting competition/choice or raising prices? ● Should we go beyond ‘asymmetric paternalism’?

10. Issues for behavioural economists 3 ● Are there cultural or learned differences between countries that imply different policy solutions?  What does this mean for harmonisation of consumer law across EU?  e.g. How might removal of established consumer rights affect consumer confidence?  Examples: UK right to full refund if sold faulty goods UK Competition Commission Orders (remedies following market investigations)

11. Issues for behavioural economists 4 ● Key conclusion seems to be that targeted research is required, both ex post and ex ante  How can policy-makers best liaise with academia to ensure that this happens?  N.B. OFT economic discussion papers on: Assessing the effectiveness of potential remedies in consumer markets (ESRC CCP, 2007) Interactions between competition and consumer policy (Mark Armstrong, 2007) ‘Road testing’ consumer remedies (forthcoming)

12. Postscript on UK market inquiries ● UK regime includes market studies (OFT) and market investigations (CC). Latter have remedial powers ● These sit alongside general competition and consumer law, and allow holistic analysis of issues ● Markets often involve insufficient transparency, consumer search, and/or consumer switching  e.g. Personal current accounts in retail banking ● Behavioural economics has a key role to play in diagnosing problems and designing remedies!

13. Personal Currents Accounts (PCAs) ● High Court Ruling:  PCA unauthorised overdraft charges can be assessed for fairness ● Market Study:  High revenues from hidden charges (£2.6bn of total £8.3bn)  23% of accounts incurred an insufficient funds charge in 2006  Fees can be substantial (£100s)  Lack of learning: Of those who incurred in 2006, 57% also incurred in 2005  Lack of switching between main banks

14. A role for behavioural economics? ● Does BE help explain why this is happening?  Over-optimism: Do consumers underestimate the likelihood of triggering charges?  Myopia: Do consumers overly discount the future when choosing provider?  Calculation inability: Are consumers unable to calculate what charges will mean for them?  Failure to learn: Are consumers unable to learn about liability and extent of charges? ● Or how best to remedy the problem?

15. Issues for behavioural economists 5 ● Can/should we apply behavioural economics to firms’ decisions too?  Firms as chains of decision-makers?  Potential for herding behaviour?  Implications for firms as consumers?  Implications for firms as potential law infringers?  Implications for competition?

16. IMPACT ESTIMATION PROJECT What do policy-makers need from behavioural economists? Dr Amelia Fletcher Chief Economist UK Office of Fair Trading DGSanco Conference 28 November 2008 (The views expressed here are my own and not necessarily those of the OFT)

17. Herding? Anchoring? Add ons? Price-drop TV shopping: Should we intervene? If the information is false? If the information is correct? CDs are advertised at £5, cost of the call £2, P&P £7. Paying attention to the wrong thing?

18. Default bias Default Bias Practice to be outlawed under the European 3 rd Aviation Package Will ticket price just increase so no net gain? Should we be more concerned with search costs?