Banks, Finance/Insurance, Energy, Airline and Telecommunications companies are all examples of confusopolies – organisations with similar products who intentionally confuse customers instead of competing on price.
The word “confusopoly” was originally coined by Dilbert cartoonist Scott Adams in his book The Dilbert Future. Adams has an MBA in economics and management. He uses this knowledge along with his cynical cartoonist insight into how people think to explain the idea:
Any company’s incentive is to transfer the greatest amount of money from consumers to stockholders. And to do that in a competitive industry you usually end up with what I call confusopolies.
A confusopoly is a situation in which companies pretend to compete on price, service, and features but in fact they are just trying to confuse customers so no one can do comparison shopping.
Cell [mobile] phone companies are the best example of confusopolies. The average consumer finds it impossible to decipher which carrier has the best deal, so carriers don’t have normal market pressure to lower prices. It’s a virtual cartel without the illegal part.
Examples of confusopoly pricing include upfront discounts on 2 year contracts eg: first 3 months free and early disconnection fees eg: $150 penalty for cancelling a contract early.
Australian economist Professor Joshua Gans examined the confusopoly issues in the context of deregulated energy companies and made these findings:
- When faced with an upfront cost and future options, consumers will over-weight option value and spend too much upfront
- When faced with an upfront benefits and future avoidable costs, consumers will under-weight ability to avoid costs and spend too little upfront
- Consumers will under-weight importance of disconnection fees
- Consumers will under-weight ability to opt out of automated payments to switch in the future
- Consumers will under-weight future switching costs
- Consumers will fail to invest in information to make choices transparent
- Firms will not have an incentive to provide transparency as consumers will demand more upfront to compensate for switching costs later on.
- Likelihood of consumer choice providing a locus for effective competition is bleak – Energy retailing looks like a confusopoly