I stumbled across an interesting perspective on the regulation of markets in a report by the Behavioural Insights Team. They want to regulate the market, via nudges, to be more efficient (previously, I had only considered regulation for incorporating external costs – see here).
Collectively the UK public is overpaying for mobile contracts by 355 BP million a year while in the energy market millions of households could save over 300 BP by switching supplier. Similarly, estimates suggest that up to 80% of consumers are missing out on the best deal for their annuity, costing consumers between an estimated 230 million and 1bn a year in terms of lost lifetime income.
(todo: obligatory and cursory intro about ‘rational people’ not being so rational. Ok, now that we got that out of the way)
Regulation for efficiency
Say we have two companies in our electricity market, A and B. If A sells energy cheaper than B then we want to reward them for being efficient and allocate more customers to them (alternate view, customers of B move to A to save dollar-dollar-bills). So, we could identify those customers who are not being rational (paying more $ per energy than required) and nudge them to be more rational (shock them until they change provider).
(Ahh, so this is what the govt is up to when they fund price compare sites such as powerswitch.)
Anyway. Nice idea, but, $ per energy isnt all we care about, there are other sources of value.
Take an electricity company provides much more value to customers than just energy per dollar. Other things that are valuable;
- reliability of the energy supply,
- availability of the energy supply,
- carbon footprint of the energy produced (valuable to some),
- education about energy production,
- easy interface for managing power usage,
- insurance policy,
- non-locked in contract,
- and what else …?
So how can we fairly compare two companies when they provide many different kinds of value? Currently, this doesnt seem possible. To achieve this we would need to be able to quantify (monetize) every action that a company takes.
Problem is that people are paying for many services in one. It would be great if we could disentangle the value(s) and assign credit to the creators. Production, management, education, …
(a similar problem occurs within governments!? voting for many policies in one. in fact, this problem is quite general, how can we disentangle latent features?)
As a naive attempt to solve this problem you could use a separate business to do each atomic part of the value production (but how do you draw the line between …/what are the atomic parts?).
Another solution already exists?
From a different perspective, is there already an incentive for a third company, C, to act as an intermediary? C could survive by exploiting the difference between the two companies, extracting value from the transfer from A to B or vice versa. They could provide a service that guarantees the lowest price (will transfer you to lowest current price asap). Finally, the company that receives the customer pays C a commission.
(Similar business model as many online price recommendation services…)
Unanswered questions
It is unclear to me what the ultimate goal of a market is. If A is more efficient than B then we want A to get all the rewards and B to get none? But this will eventuate in a monopoly! So…?