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How to improve the efficiency of markets
Old 10-05-2009, 11:56 AM   #1
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How to improve the efficiency of markets

From another thread on credit card company shenanigans, Martha comments on policies and competiton:
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Changing how interest is calculated is not likely to result in a significant number of new customers or the loss of a significant number of customers. So, competition may be close to irrelevant on this issue. Partly this is because any complicated service is very hard for people to evaluate. You are supposed to work 40 hours a week or more, raise your family, etc. and yet be a good and knowledgeable consumer of all things ranging from cell phone plans, credit cards, health care, and retirement plan options. People get paralyzed by the multitude of decisions and end up not reading the credit card fine print, don't read their mortgages, and they pick one option in a retirement plan and never look again.
I wonder how we can fix this problem of increasingly complicated products that gum up competition. Look at the amount people spend on these products Martha mentions (add in mortgages, home data and telecom services, etc)--I'll bet they account for 50% of consumer spending, and yet the marketplace for these services is highly inefficient because the information needed to make the choices is difficult to use. This results in higher costs and, ultimately, less satisfactory services.

The providers of these services like an inefficient market and data glut--it decreases competition and improves profits.

So, what's the answer? Some options:

A) Leave things as they are. Companies will continue to add to the complexities (and "gothchas" to improve profits). Some of the complex "frills" added will be useful to consumers, and the companies offering them will get a deserved competitive advantage. If it gets bad enough it will self-correct as companies will look for a competitive advantage by marketing simpler products and people will buy them.

B) Standardize products: Administered by the government or by "encouraged" voluntary compliance. The standardized packages allow consumers to pick the standardized package that best suits their needs, then compare providers by price and quality of service. This would be similar to the standardized Medigap insurance policies (Choose one: A-L). One Con: stifling of innovative new product types.
One Pro: Of the ideas here, this is the only one that could prevent the further proliferation of niche fees in the fine print of contracts (late fees, double-cycle billing, $10 per text message when you go over the amount allowed in your package, etc)

C) Modeling: If consumers could go to a single web site for each type of product and enter their anticipated use info (e.g. cell phone minutes each month, text messages sent/received, etc), then the costs of that service from all the providers in their area could be calculated. Sensitivity analysis could be included (e.g. "If you increase or decrease your text messages by 10%, your costs could go up or down by as much as $30 per month).
Pros: This modeling would not hamper innovation as much as Option B above.
Cons: Who would build the model? Do we want the government doing this? Maybe a consumer group like CU?

D) Required pricing info for several standardized customer profiles: Therr'd be no mandatory standard packages, but the providers would need to show the monthly fee and a brief sensitivity analysis for 5-10 standardized "customers" in their marketing literature and web sites. The consumer could compare the cost of service among providers for the customer profile closest to his. This would be easier to implement than Option C, and less constraining on the free market than Option B. This option will not reduce the complexity of products.

Increasing the efficiency of these markets is a net benefit to everyone. The challenge (IMO) is to do it without increasing the role of government in our lives.
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Old 10-05-2009, 04:23 PM   #2
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Great post samclem! It's a subject I keep thinking about starting a thread on, now I don't have to!

I'll throw in one other perspective - sometimes free markets seem to "work", but they may work against me (if I am in a minority viewpoint). One example is those "cheap" (to buy) ink jet printers, with expensive, proprietary replacement cartridges. So I guess we can say the market "works", because a bunch of people were attracted to the low initial cost. But some of us with an eye towards total cost of ownership are left out in the cold.

A solution could fall into that standardization category (close to your option D?). A clear, standard, cost over time number might help to inform the average consumer of the "true cost", and more of them might make decisions based on that added info. Some may want a low upfront cost, and don't care - that's fine too, but I don't have much of a choice these days.

In the same line, gasoline use/costs over 10,000 miles would probably lead to better decisions than mpg numbers.

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Old 10-05-2009, 07:10 PM   #3
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Any economists in the house? I really would be interested in what they have to say.

I have become very jaded about "disclosures." Truth in Lending. HIPAA privacy rules. New SEC disclosure requirements. So much blah blah blah that rarely effect a buying decision. Comparative information in a standardized format may be an improvement if simple enough.

Modeling would be great, but as SamClem said, who does it? And how will they get paid? I hope the health insurance exchange, if it comes to pass, does this adequately. There also likely will be an element of standardization through minimum standards.

Interesting topic, I wish I knew more.
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Old 10-05-2009, 07:20 PM   #4
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Quote:
Originally Posted by samclem View Post
C) Modeling: If consumers could go to a single web site for each type of product and enter their anticipated use info (e.g. cell phone minutes each month, text messages sent/received, etc), then the costs of that service from all the providers in their area could be calculated. Sensitivity analysis could be included (e.g. "If you increase or decrease your text messages by 10%, your costs could go up or down by as much as $30 per month).
Pros: This modeling would not hamper innovation as much as Option B above.
Cons: Who would build the model? Do we want the government doing this? Maybe a consumer group like CU?
A little off topic, but something like this already exists for cell phone plans: MyRatePlan.com - Unbiased Comparison Shopping for Services

I know nothing about the accuracy or impartiality of this website or who is paying the the bills. I do know I have seen the site featured in some T-Mobile commercials, which makes it suspect as to bias.
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Old 10-05-2009, 07:50 PM   #5
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A little off topic, but something like this already exists for cell phone plans: MyRatePlan.com - Unbiased Comparison Shopping for Services

I know nothing about the accuracy or impartiality of this website or who is paying the the bills. I do know I have seen the site featured in some T-Mobile commercials, which makes it suspect as to bias.
Thanks--that's about what I had in mind. It's not constructed exactly as I would have built it, but the basic functionality is certainly there.

Like you, I wonder about the impartiality--they are selling products directly to consumers, and they also are carrying some ads. It does not inspire confidence. But, somebody has got to pay the bills.

While Consumer's Union makes me cranky with their frequent forays into public policy, they have the credibility that this undertaking requires. It would be great if they could take on something like this--web-based custom comparisons of insurance policies, credit cards, cell phone plans, home digital data services (cable TV, phone, internet, etc). It would be a huge undertaking, especially as many of these products have different providers and features in each market. It's a long way from testing lawnmowers and pancake syrup.
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Old 10-05-2009, 07:50 PM   #6
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I have become very jaded about "disclosures."
Yes, most are lacking, but there are a few that work fairly well. How about the standard disclosures for mutual funds? IIRC, 10 or 15 years ago it was much worse. Now, you have that "hypothetical" $10,000 invested would grow to $XX,XXX over 10 years (or whatever) and accounts for expenses, etc. Not perfect, but pretty good. We ought to build on what does work.

And it doesn't always need to be the govt. If an industry wants to cut confusion and shut out shady advertising to attract more customers, they can create their own standard reporting mechanisms. It worked for URL back at the dawn of the electrification of America. Bolts have grades for different strentghs, etc. I can buy a disk drive with X rpm, Y gigabytes, z seek times.

Things are more complex now, but our advanced systems should also be able to be used to simplify some of that. Remember the thread about the Volt Hybrid car? It's not so easy to state the mpg, or the cents per mile because it is a dual-fuel car (gas and electricity) and it varies depending on your driving profile. You can simplify it, but the economics are just not as simple as a single fuel car.

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Old 10-05-2009, 08:03 PM   #7
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Quote:
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I hope the health insurance exchange, if it comes to pass, does this adequately. There also likely will be an element of standardization through minimum standards.
From my POV Medigap policies are an excellent example of standardization. Overpriced policies still get sold, but not to informed consumers.

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Old 10-05-2009, 08:17 PM   #8
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This got me thinking about the whole complexity issue. I don't think our education system has adapted to teach kids how to deal with a more complex world.

My DD spent months learning a bunch of rules and techniques to prove whether one triangle was congruent to another, or whether angle X could be defined as a compliment or supplement to another angle. These skills have value, and train your mind in some ways, but I can't help thinking that our schools need to make sure kids also have some idea of how to calculate a total cost of ownership, or really understand how to evaluate a purchase and/or contract. I think we are lacking in this regard.

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Old 10-05-2009, 08:27 PM   #9
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My DD spent months learning a bunch of rules and techniques to prove whether one triangle was congruent to another, or whether angle X could be defined as a compliment or supplement to another angle. These skills have value, and train your mind in some ways, but I can't help thinking that our schools need to make sure kids also have some idea oh how to calculate a total cost of ownership, or really understand how to evaluate a purchase and/or contract. I think we are lacking in this regard.
-ERD50
But that would be in conflict with the true purpose of American Education- which is to keep young people off the street and out of the labor market, without their parents having to pay for day care. And of course to afford a nice make work project for a large block of guaranteed pro-government teacher-voters .

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