evious in creating endogenous switching costs. Companies like Vodafone are notorious for bundling their services, making it more expensive for consumers to switch or opt out of the contract (Burnett, 2014). While bundling seems cheaper, it removes transparency i.e. while some features may be desired, others are not, unnecessarily driving the price up. It is more expensive to consume the services individually, and since all firms in the market work in this manner, consumers are limited in their options. The firm has therefore created a scenario where they can generate greater revenue and make customers less likely to switch. The final model is as shown, where bundling, B, and switching costs make it harder for the customer to leave.
Challenging, expensive cancellation processes and rolled over contracts makes bundling even more effective. When customers can’t terminate contracts easily, such as with EE and Virgin Media, it prevents switching. Fining companies and passing legislation to reduce exit fees for violating the contract would make it easier for consumers to switch.
Rolled over contracts means firms automatically renew contracts without efficiently warning customers. This comes at a risk of paying a higher fee, for the same service, each successive period; ‘price jumps’ in the energy sector, ‘price walking’ in insurance and ‘legacy pricing’ in broadband (CMA, 2018).
An effective measure of stopping firms unreasonably increasing prices is through price capping. In the energy industry for example, it can be a maximum limit on what can be charged per kWH. Ofgem implemented a price cap on energy prices at the start of 2019 with savings estimated to be £76 per average household (Ofgem, 2018).
Another solution is to promote greater transparency. Citizens Advise suggested that the mortgage market should change the name of ‘standard variable rate’ to ‘expired rate’ (Citizens Advice, 2017). This alerts consumers that their discounted rate has ended, and they are now going to be charged at a higher level. Greater transparency is likely to incentivise obdurate customers to look for better deals as the asymmetry of information is mitigated.
The CMA also suggested that firms should also be held publicly accountable for their exploitative techniques (CMA, 2018). For example, Ofcom launched the ‘Boost Your Broadband’ website advising customers on the best broadband deals they can get in their area (Ofcom, 2018). The rise of price comparison websites, and campaigns to inform consumers are also useful. Ofgem’s collective switch trial saw the switching rate increase from 2.6% to 22.4% when households were notified that they were overpaying for their services (Ofgem, 2018).
