The $10 minibar beer is no basis for capitalism


If you plan to fly with a low-cost airline this summer, you will have discovered that the final bill was not so low cost after all. Additional charges, not just for baggage but for payment and even for checking in, have prompted a super complaint from the UK consumer organisation Which? and spurred the Office of Fair Trading into action.

And have you struggled to understand your mobile phone bill? Bought a cartridge of ink that costs almost as much as the printer? Do you fill in your personal details on an insurance comparison website every year, or just accept uncompetitive renewal terms? Have you used the internet or the minibar in a hotel, or watched the teaser offer on a mortgage revert to a standard variable rate?

Products are complex, and time is scarce. Consumers focus on a few headline prices and features when they make their choices and so competition is focused on those headline prices and features. Economics 101 teaches that markets work best when competition leads to prices in line with costs, but in markets like these, competition has the opposite effect. Producers do not necessarily make excessive profits overall because the prices of key features are forced down to uneconomic levels. No one can really give you a free mobile handset, or fly you to Bratislava for 99p.

But the retailer with simple, honest pricing must seek to match these offers. If the winner of the competitive race is the company that is most innovative, not in productive efficiency or customer service, but in the ingenuity and opacity of its tariff structures, consumers will not be happy, or well served, in the long run. Ryanair is simultaneously popular and despised.

Almost everyone, consumers and producers, would benefit if these practices stopped, despite the feeble attempts of lawyers, public relations people and economists to justify them. These hired guns argue, often correctly, that consumers can, with sufficient diligence, obtain all the information they need. But most of us have better things to do than to engage in line-by-line scrutiny of our mobile phone bills, or undertake a discounted cash flow calculation of the lifetime cost of a £50 document printer. Thank goodness. Show me the person who has actually read the “important information” you must understand before entering the website of an institution regulated by the Financial Services Authority, and I will show you a man who has difficulties with girls.

Small regulatory and legal changes might help. A general principle that charges for making payments must be related to the transactions’ actual costs would both end some abuses and stimulate use of the cost-effective debit card system. Many people thought the law prohibited penalties in consumer contracts – disproportionate charges for minor infractions, such as late payment of credit card bills – until the courts decided otherwise. Legislation could reverse that position. Richard Thaler and Cass Sunstein have usefully suggested that utility providers present bills in standardised machine readable form to facilitate price comparisons. In some cases, agreements between firms, brokered by the OFT and negotiated under the threat of extended regulatory investigation, might do the trick.

Many people may think the problem of the $10 minibar bottle of beer is unimportant in the context of financial crisis and global macroeconomic imbalances, or that the costs of a regulatory drive would exceed the likely benefits. I disagree. Encouraging bad decisions through teaser mortgage rates was a central contributory factor in the financial crisis. Business practices whose rationale derives from consumer ignorance and producer knowledge create a larger problem. When people see many examples of minor exploitation of consumers in their daily lives, they will conclude that extensive exploitation is characteristic of business as a whole. And they may be right. If caveat emptor is seen as a dominant business principle by both producers and consumers then the legitimacy of capitalism and market organisation will not long survive.

Print Friendly, PDF & Email