Saturday, 25 May 2013

Measuring the degree of competition

It got surprisingly little media or analyst coverage, but last Tuesday (21st) the Electricity Authority released the results of the latest surveys it has conducted of the perceived levels of competition in various branches of retailing. They were particularly interested in electricity retailing, naturally, but they also included a wide range of other major retailing sectors - the banks, electrical goods stores, online book stores, petrol stations, the supermarkets, and the telcos.

People were asked, "Using a 0-10 scale where 0 means not at all competitive, 5 means just adequate and 10 means extremely competitive, how competitive are the following businesses in terms of working to get your business and offering you the best deals? If you do not know enough, just say so".

The graph below summarises consumers' responses, and compares them to a similar 2011 survey the Authority had also carried out (and which, I regret to say, flew below my radar at the time).
Granted, these are perceptions rather than any underlying reality: retailers, if observed selling the same thing at the same price, could in principle be in near-perfect competition, or they could be in close collusion, and a consumer wouldn't necessarily know which. On the other hand, people aren't mugs, and can often be trusted to figure out the nature of the options they're shown. So I'd be surprised if these perceptions were wildly off the mark of the reality.

One bit of good news is that, over the past two years, perceived levels of competition have risen across all the retail sectors surveyed. Hopefully, that's the structural reality, and not something cyclical - the  ANZ-Roy Morgan Consumer Confidence Survey has risen strongly over the same period, and maybe households are just feeling more upbeat about everything - because increased competition generally contributes to both productivity and innovation. The UK's Office of Fair Trading published a very good paper in 2007 showing the various ways in which this happens, if you're interested in more.

Competition - consumers' views

One oddity in the graph above, however, is the low perceived competitiveness of online bookstores: my pre-survey guess would have been that they would have featured very favourably. Amazon, and the online operations of Barnes & Noble and of Sydney's excellent  Abbey's bookstore, certainly make a good deal of effort to get my custom. That's where the Electricity Authority's simultaneous survey of 81 'stakeholders' is rather helpful. It was mostly major players in the electricity industry (generators, distributors, retailers), but also had energy users and energy consumer representatives, plus some investors, educational institutions, and professional bodies. 

Their, arguably more informed, assessment, is shown in the graph below. And it fixes the anomaly: the online booksellers move from bottom (in the consumer survey) to middle of the pack (in the stakeholder survey). Otherwise the assessment is pretty much the same as the consumer one - which rather leads you to believe that both surveys may be picking up the same underlying reality - except that the stakeholders rate electrical goods stores more competitive than supermarkets, which is plausible, too. I certainly feel I've got more choice when it comes to PCs than when it comes to groceries.

Competition - stakeholders' views

There was also an interesting table in the consumer survey, reproduced below, showing the level of 'Don't knows' for each of the retailing sectors.

Distribution of consumers' answers

By and large, consumers feel they know whether they're being offered a more or less competitive landscape. As I say, they could be wrong, and they might be getting smoke blown in their eyes by a simulacrum of competition - marketing ballyhoo in one small part of a market, for example, disguising lethargic competition in the bulk of it - but on its face it's quite an encouraging result.

It helps to explain the online booksellers, too. That's the only retail sector in this survey where there were very high numbers of people who were unsure about the level of competition. It seems odd to me - I would have thought the word had got out about the Amazons and Book Depositories of this world - but evidently not. My guess would be that next time this survey is done, the 'Unsures' will have dropped quite a bit, and the online operations will come out in a more favourable light.

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