Loyal, lazy or time poor?

28 September 2018

Today Citizens Advice issued a super-complaint to
the Competition and Markets Authority about the
‘loyalty penalty’.1
According to Citizens Advice, firms are ‘routinely
punishing their customers simply for being loyal’,
which disproportionately affects vulnerable
customers such as older people.
Who is affected?
The super-complaint focuses on five retail markets
in two sectors: financial services (home insurance,
mortgages, and savings) and telecoms (mobile and
broadband). However, the issues raised reach far
wider than this, to other sectors, such as energy,
transport and water.
Regulatory context
Regulators and policymakers are already
investigating similar issues in a number of contexts.2
The government’s energy market price cap is
targeted at helping customers who do not switch
their provider. The Financial Conduct Authority is
considering what forms of price discrimination are
acceptable, and is applying this in the mortgages
market study, the proposal for a basic savings
rate, and a forthcoming insurance market study.
Ofcom is consulting on how to ensure that mobile
customers get ‘fairer tariffs’ after their minimum
contract period expires.
Switching is necessary for competition and switching
is unlikely without an incentive. Further, it is not clear
that charging higher prices to those who are time-
poor is a market failure, and the unwinding of price
discrimination is likely to benefit some customers
and hurt others. Thus regulators will need to be
cautious not to cause unintended consequences.
What should firms be doing?
Fairness is a subjective matter and, in our
experience, to inform a sensible discussion at board
level it is useful to look at product design and pricing
from four perspectives, shown below. Each
perspective adds insight using a new toolkit of
behavioural economics, competition economics,
business model analysis and quantitative
techniques. There will inevitably be tension between
the different perspectives and it is useful to make
this transparent—trade-offs will have to be made. An
agreed product purpose informs these trade-offs.
The fairness framework

Why do existing customers sometimes pay

higher prices?
New customers can get lower prices than existing
Source: Oxera.
customers for three reasons:
 competitive dynamics—fierce competition for
The CMA has 90 days to publish its response to the
new customers, some of whom will then stay
super-complaint, and therefore has around three
loyal;
months to consider the complex issues surrounding
 technological advances—cost reductions mean market functioning and fairness across the five
that better products can be offered over time; identified retail markets. The authority’s conclusions
could influence many other markets, affecting firms
 firms compete to attract more profitable and customers across the wider economy.
customers, via customer data and algorithms.3
Oxera advises firms on how to tackle these issues,
Each of these can be positive for customers, and and our fairness framework has delivered results for
price discrimination may be good for society overall. clients across industries.

1
Citizen’s Advice (2018) ‘Citizens Advice issues super-complaint Oxera (2016), ‘Energy market investigation: what next for the GB
as loyal customers continue to be penalised by over £4 billion a retail energy market?’, June.
year’, 28 September.
Oxera (2016), ‘Please leave a message: has telecoms become
2
Oxera (2017), ‘Should we be cross about cross-subsidies?’, too complex for consumers?’, August.
March. 3
Oxera (2017), ‘When algorithms set prices: winners and losers’,
June.

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