John Kay, with whom I had the pleasure of working a couple of years ago, has written an article for the Financial Times (reprinted on his website) that claims sometimes, a spot of collusion can be a very good thing for consumers. He is wrong, and dangerously so.
Kay’s main claim is that competition can work ‘too well’, leading to competition for low headline rates followed by significant, invisible and unavoidable additional charges. While the undoubtedly happens in some cases, to generalise this claim is not only to assume that consumers are dolts, but also to assume that they never learn. If Kay’s ‘homily of the hire car’ teaches us anything, it’s that you need to buy only from brands you can trust not to hide their prices. If he would not make the same car hire choice again, then the business models he decries are short-sighted: they simply will not sustain in the long-run. On the other hand, if he is tempted to return to the same firm, in full knowledge of the company’s pricing practices, then he needs to consider whether there is a problem at all. (After all, I am assured that some people choose to fly on RyanAir more than once.)
Kay’s response to this – that all companies are driven to be equally conniving in a race to the bottom – is far from universally true. Price is not the only form of competition, and not all customers base their purchasing decisions on headline price alone. I am not criticising those who use comparison sites to buy things, not least because in many cases, I am one of those people. But price comparison sites are there to give the cheapest headline prices to those who care about the cheapest headline price. That makes sense in some cases, such as if you are buying a generic, well-defined product and don’t care about delivery speed or customer service. It makes very little sense when you don’t understand what you are buying.
There are businesses – good businesses – that make no attempt to offer the cheapest headline prices. Indeed some of these businesses even mock their rivals’s pricing exclusions (see the advertisement, below). Companies such as British Airways and John Lewis compete on quality and service. This doesn’t mean they abandon value (they’re Never Knowingly Undersold), it just means that they’re not tied to the idea of competing for the custom of those who want the cheapest headline price.
This British Airways advertisement mocks low cost airlines’ pricing models
Companies that compete on quality exist to serve once-bitten customers. RyanAir’s continued experiments into human psychological endurance are the best possible recruiters for quality airlines. The value of quality brands is never higher than when consumers are nervous. So there is a natural balance: some companies are bottom-feeders, others swim a little higher in the tank. When Professor Kay talks about there being no good companies left, he should consider whether looking at price-scraper websites is the best way to find them.
On the other hand, and in defence of complex pricing, there are consumers who would knowingly walk the return leg of a shuttle bus journey to get a free ride one way; enter a supermarket only to buy the loss-leaders; or hack their printer to accept liquid ink rather than buy an overpriced refill. These people are not stupid: they are benefiting from low headline prices by side-stepping the optional extras. While there are no legitimate grounds for companies to hide mandatory fees, these shady practices already attract sanction, and a good strategy for avoiding them is not to go near companies with which they are associated.
Why do I say that Kay is not only wrong, but dangerously wrong? Well, firstly, if the Professor truly believes that these businesses are verging on criminal, then why would he believe that their collusion would limit itself to creating transparent pricing standards? If these firms are not honest, then they will not become so when they meet. The relevant Adam Smith quotation is hackneyed but warrants repeating:
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Adam Smith, The Wealth of Nations
Furthermore, if you start to imagine that businesses are all out to commit “petty fraud” against their customers, you start thinking that more regulation would be a jolly good idea. Not only does this introduce more red tape for all (which is likely to raises costs and prices for customers across the board) but it too quickly becomes a War on Pricing Freedom. What’s the exit strategy for such an engagement? Will any form of price discrimination be allowed? Are student discount cards to become contraband?
I hope the new Competition and Markets Authority does not undertake the “fundamental rethinking” of competition law that John Kay suggests. I can think of nothing so damaging for consumers as a government body that takes it into its head that it exists to marshall cosy cartels into price fixing agreements. This vision is not ‘competition’. It is barely a ‘market’. It’s a call for a ‘Pricing Authority’, and that is retrograde step for us all.