Skip to main content

Many have interpreted the outcomes of the Brexit referendum and the 2017 general election as a rejection of a market-based economic settlement that is not working for a significant portion of the population – both in terms of providing good work and value for consumers.

At their best, free and functioning markets are a driving force of job creation, innovation and prosperity. They also increase value for money. The recent retail price war, which saw the “big four” supermarkets slashing prices in the face of increased competition from Aldi and Lidl, highlights how competitive forces can lead to better outcomes for consumers. Mortgage rates have also been pushed down in recent years as lenders have had to compete hard to win over customers.

All too often, however, consumer markets are dominated by a lack of choice and barriers to switching supplier. Inertia among households does not help either – with unengaged consumers often sticking with poor value telecommunication, banking and energy companies. In some markets such as the private rental sector, businesses also appear to be taking advantage of the weak bargaining position of households.

The consequences of this are clear to see. Customer satisfaction levels are relatively low in concentrated industries such as energy and telecommunications.

The most vulnerable, least engaged consumers often face the highest prices. Research by Ofcom, for example, found that landline-only customers – who are disproportionately likely to be poor and old – had seen rental charges increase by up to 49% in real terms over the past decade. At the same time, wholesale costs of providing a landline service had fallen by 26%.

Despite low costs for credit checks and producing a standardised contract, tenants in the private rental sector have seen a substantial increase in letting agent fees in recent years. Tenants, who are often desperate for a roof over their head lack the bargaining power needed to rebuff excessive prices.

Ultimately, when consumers are disengaged and lack bargaining power, and when barriers to competition are high, households get a raw deal. In these cases, a “free” market can easily become what many people would consider an “unfair” market.

The case for tackling this is compelling, not least because the existence of unfair markets undermines broader faith in markets, full stop. Unless we make markets fairer, there is a risk of this paving the way for a raft of anti-business measures or even the outright abolition of markets – through nationalisation of industries such as transport and energy. This would almost certainly lead to worse outcomes for households and the economy more widely.

The will within Government to make markets fairer, with better outcomes for consumers, is there. For example, the Conservative manifesto for the June 2017 General Election emphasised a need to tackle inequality of outcomes in the energy market – where disengaged consumers find themselves on poor value deals.

So what’s the best route to fairer markets? SMF research provides several insights.

We think there’s a case for re-examining the relationship between buyers and sellers, particularly in markets where consumers are disengaged or have little bargaining power. The ban of charging letting agent fees is an example of this. But we believe that reforms should be considered elsewhere. Reverse auction schemes in energy, where suppliers bid for consumers’ business, could lead to a much more active and price competitive energy market.

It is also worth reconsidering the role and remit of regulators, with a greater emphasis on tackling issues around price transparency and the inequality of outcomes between those on the best and worst deals offered by a company. One approach may be to curb use of rolling contracts, forcing companies to inform consumers about better deals at the end of a contract term.

There is also a case for regulators to do more to make markets more symmetrical – it should be as easy cancel a subscription as it is to sign up for one. A service that can be signed up for online, should be cancellable online. Forcing individuals to phone to cancel creates barriers to switching, especially if phone calls involve hard selling techniques to discourage cancellation. In particular, this can trap vulnerable consumers in poor deals.

Fairer markets lead to more innovation, better customer service and lower prices for consumers. But they do not always come about naturally. In our view, consumer engagement and bargaining power are necessary for a market to be fair – having choice of supplier is not sufficient. Government needs to recognise this with a new, radical approach to regulation. The costs of not doing so are potentially substantial.

Scott Corfe is chief economist at the Social Market Foundation think tank. This is an article from Bright Blue’s latest magazine ‘Capitalism in crisis?