Price comparison websites – consumer champions or well branded middlemen?

meercat620_1969570aPrice comparison sites have grown hugely in the past few years. There have been expensive advertising campaigns to try and differentiate among several websites that are all almost identical in functionality. Recent research by Consumer Futures finds that 52% of consumers have switched or purchased directly through a price comparison website. Despite their growth there has been little research done to examine how beneficial they are for consumers, how they should be regulated and how sustainable the business model is likely to be.

Are they beneficial for consumers?

From an economic perspective, the evidence is unclear and depends on a number of factors. Recent research by David Ronayne at the University of Warwick on Price Comparison Websites found that in some cases consumers may be worse off.

“I found that only in the unlikely case where people who use these sites check every single one of them, is it guaranteed that they will benefit from the existence of the industry.”

“In the more likely scenario where people who use the sites do not check all of them, this is no longer guaranteed, essentially because the sites then enjoy some market power allowing them to charge higher fees. This is compounded with a higher number of comparison sites. Paradoxically, such competition does not promise to drive retail prices down as you may expect but actually can push them up.”

David Ronayne

What he may be missing however are the opportunities that price comparison websites create for smaller suppliers to be showcased alongside the traditional big players. It is likely that if there were no comparison websites, consumers would find it more difficult to find the smaller suppliers that can offer lower prices, even after the price comparison websites have taken their cut.

Should they be regulated?

The current position by UK regulators is to have a voluntary ‘confidence code’ for price comparison websites, which sets out some minimum standards and safeguards to ensure consumers are not mislead or only shown products where the websites themselves can make the most money. In return for complying with the scheme the websites are showcased on the ‘smart switcher’ website and can use the logo on their websites. Several of the large players in the market have not opted into the scheme however, and it looks unlikely that they will do so. The regulation under the scheme is also very weak, with the regulated websites only varying in a few small ways from those which are not regulated. It is likely that in the future there will be some basic regulation to ensure consumers aren’t mislead. This is in line with consumer expectations, with the majority of consumers expressing doubts that price comparison sites have consumers’ best interests at heart (IPSOS Mori for Ofgem 2012).

A second possible area of regulation is to do with the profits that each company makes from switching, which can be as high as £100 per customer. This seems to be a hang over from the days in which energy customers would send salespeople round knocking on doors and doesn’t reflect the true costs of the service being provided. Interestingly, all of the websites out there compete purely on brand and quirkiness rather than on being cheaper than any other, so it seems unlikely that competition will drive down prices anytime soon. This is one area where regulators may decide to intervene in the market in the future, though it may risk reducing customer choice in the market.

A final area of regulation is associated with environmental qualities of the different products being offered. Some price comparison websites run by governments around the world (My Power Planner in Australia or the Austrian energy regulator’s tariff calculator) prominently feature the environmental characteristics of the products alongside the price and customer service record. Regulation to force price comparison websites in the UK to do the same may be a cost effective way to encourage the uptake of green products.

How sustainable is the business model?

As long as profits remain high and marketing campaigns continue to innovate it seems like there should be no reason for the business model to change or for the market to undergo any significant consolidation. However, if the firms start to compete on price rather than brand then this may cease to be the case.

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Price comparison websites – consumer champions or well branded middlemen?

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