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In this Normal Deviance Column, Hugh looks at how companies can use pricing tactics as a revenue tool – sometimes at consumer expense.
In September last year, after a particularly expensive trip to the supermarket, I began penning an Actuaries Digital column on supermarket pricing.
The hypothesis was that prices were being increased in the form of slightly suspect discounts, where products would have large price increases and then be discounted back, but to levels above where they started.
I needn’t have bothered. A couple of weeks later the ACCC announced it would be suing Woolworths and Coles for precisely this behaviour, with a comprehensive investigation far beyond anything I could have put together. The article was abandoned, to the undoubted relief of our major supermarkets.
However, the topic of companies playing games with pricing has continued to niggle. As I’ve noticed sharp pricing practices, I’ve jotted them down. The list is not short, with some big ones below:
This brings us inevitably, like the conversation after a carpark bingle, to the topic of insurance. The industry is no stranger to pricing controversies. General insurance has attracted the most attention, where pricing can be opaque and heavily individualised.
There have been controversies around broken pricing promises and poor value (‘ junk’ ) insurance. And ongoing practices such as price optimisation, where companies alter pricing for non-risk characteristics, remains controversial (even though research suggests that it's very hard to get right !). However, insurance products outside of general insurance are not immune to pricing games.
In health insurance, the “phoenix-ing” of plans (where a plan is retired and a new similar one introduced at a higher price point) is a concern . In life insurance, while there is less recent controversy, specialty insurance such as funeral insurance has drawn the close attention of regulators.
First, I’m convinced that companies have a wide array of tools to alter prices in ways that increase prices and profits. Some of these tools are new, and others are longstanding, but easier to implement as the world has gone digital.
Second, even if consumers are savvy, pricing games place an “attention tax” on consumers, forcing us to check prices, get extra quotes, and make calls, all to secure decent deals. This attention tax is the price we pay as the “rational consumer” that economists assume in models.
Third, the argument that all pricing games are automatically bad for consumers is too simple. Many approaches (including price optimisation in insurance) will increase prices for some and decrease for others; something the UK regulator acknowledged in its review , which did not ban the practice. Likewise, a petrol cycle can be a boon if you can time your tank.
And finally, I’m glad that the Institute has seen a role in exploring pricing fairness of late. A bit like my supermarket bill, attention to pricing fairness is likely to grow over time.