Crushing Confusopolies
The more options there are, the freer you are to choose, right? Nothing could be clearer than that, right?
You are in for a surprise!
How much spare time do you have? Hours and hours of just free time you need to fill up? No? Well then you are like most people today.
So let’s say you don’t have that much time. How much of it do you like to spend on comparing products. Like on mobile phone contracts? Or the ideal portfolio for your retirement? Or the ideal healthcare plan?
Let me guess: those are not your favorite pastimes, right?
Do you know that there are entire industries thriving on this very tendency of yours?
Scott Adams coined for them “confusopolies”. It’s defined as “a_n industry in which price competition is eliminated by making products and services so confusing that customers can’t tell what they are getting for their money._” [ADAMS, p.136] Instead of providing you a service and naming you a price you can understand, you will get an array of complex mixtures of different components on a service.
Let’s take credit cards as an example. There are annual rates, conversion fees, surcharges for using an ATM, bonuses for buying certain categories of products, different interest rates on your balances, different fees for late payments and of course different deadlines for all of these fees, charges, bonuses etc.
In the end, you can’t answer the one question you are interested in: “What does it cost me to use this product?”
The result of this? You have no idea and are easily influenced by advertising.
Sometimes even the name of a tariff is enough to entice customers to choose a certain product. It’s way easier to come up with a name for your product that people like, i.e. “Chocolate”, “Shiny”, “Panda”, “Gold”, etc, than to create a product people really want for a good price.
The problem: this kills the very foundation of a market.
A market is a huge experimental testbed. Companies create products and offer them for profit to customers. The sales and profits are a strong signal for the economy to determine what’s wanted by customers.
The market is a feedback-driven information machine. At least that’s what is supposed to be.
But a confusopoly garbles exactly that signal, the the control signal of the economy, and renders it completely useless. The products are so complex that customers can’t determine what value they get and what they are paying relative to alternatives.
Unfortunately, you will find this tendency to complicate products to the point of no-comparison in a lot of industries; credit cards, mobile phone contracts and financial products like mortgages and retirement plans – and of course in the healthcare sector.
You will probably find the same pattern for a lot industrial equipment as well.
I think we are looking at a market failure here. A huge one.
We realized a long time ago that the sheer size of a company can “break” the functioning of market. We have not converted our well documented and often personal realization that complexity overwhelms human beings into similar laws.
Consumers are left without an idea what products and services will cost them for some of the most important categories there are.
What can be done? Just RECAP!
Richard Thaler and Cass Sunstein presented a proposal to aimed at this market failure in their great book: “Nudge: Improving Decisions About Health, Wealth and Happiness“.
It’s called RECAP: Record, Evaluate, and Compare Alternative Prices.
I like to think of it as a minimally invasive change to the market. There would not by any regulation on how much a company can charge for a service. But there would be a mandate to change their disclosure practices.
Companies would be mandated to create digital records of usage of certain products and the pricing formula.
What prescription drugs did you get? How often? What doses? How often did you call to Canada? How often were you called from Canada? How often did you use an ATM? How often did you pay for fuel? All of that goes into your personal usage record.
This digital record has to be made available to you. You can then take your usage profile to an evaluation website for these different services and it will evaluate your usage against the offerings from competing companies. That’s why they have to disclose their pricing formula.
In the end, you the customer, get a price for your usage from all the different offerings. The single number you care about and weren’t able to get.
From an accounting perspective, this wouldn’t change much for companies; they are already charging your all these fees, services, bonuses etc. anyway. But they’d have to disclose them in an auditable way. Would they like it?
Probably as much as a vampire would like a garlic-oil soaked, silver-tipped, far-UV light-emitting oak stake anywhere near it. But the goal is to give customers the ability to compare prices.
This fixes a market failure that prevents it’s proper functioning in critical sectors: the capacity of companies to overcomplicate their offerings, thus overwhelming time-constrained human beings.
Ensuring the proper competitiveness of the market system is a task Rawls assigned to the allocation branch of the government. I bet you didn’t realize you were reading my tenth installment on justice, did you? But yes, I think it’s a question of justice to not exploit the weaknesses of human cognition in critical sectors.
This proposal is eminently testable. Why don’t we start to test it’s effect on one of the sectors? I think the mobile phone market would be a great start.
The sector has overly complex pricing schemes, but does not normally handle data, people might consider “private”, like your credit card purchases or your medication.
I am pretty sure ,we should get to these sectors pretty soon, but, as always, start small, assess the risks and scale out.
Let’s get going!
SOURCES:
[ADAMS] ADAMS, Scott. Loserthink. Penguin Publishing Group. Kindle-Version.