Price comparison websites have become very popular over the last ten years. In the UK, market research group Mintel estimate 70% of internet users have used one.
Because they list prices in one place, consumers naturally prefer to use these sites rather than visiting the individual websites of different companies. As such, price comparison websites are generally seen to be working for the consumer. Any profits they make have been deemed “perfectly proper” by Tim Yeo, chair of the Energy and Climate Change Committee.
However, my research shows they may not be beneficial to consumers, who may even be better off without them at all.
Opposing forces
Price comparison websites impose two opposing forces on the markets in which they operate. On one hand, they increase competition between firms, which pushes prices down. But on the other, comparison websites make substantial profits, which they glean in a large part from fees charged to firms for referring customers to them.
As explained on Money Supermarket’s website: “Our main income is derived from customers clicking through from results pages and buying a product.” In 2013, the company experienced turnover of £225m (up 10% on 2012), with post-tax profits standing at £35m (up 40% on 2012).
This has a knock-on effect on firms. It adds to their costs and therefore affects their pricing decisions, so can lead to them upping their prices. Indeed, amid the current furore surrounding energy markets in the UK, energy company EDF stressed this in a letter to the Energy and Climate Change Select Committee. They said that these commission payments “bring additional costs that end up being reflected in higher tariff prices for the consumer”.
No guaranteed benefit
As these forces act in different directions, it is not clear that the existence of a profit-maximising price comparison website industry is guaranteed to benefit consumers. Before the widespread expansion of the internet, consumers faced substantial search costs to compare the prices available from various firms. In this context, the scope for an aggregator to benefit consumers was clearer.
Nowadays, the benefit that price comparison websites offer is less obvious. Firms and service providers have their own websites, from which consumers can find prices in a matter of clicks, so it seems reasonable to assume that consumers would check some prices in a world without price comparison sites.
What my work shows is that the sites' drive for profit means they can be detrimental to consumers, even if they increase the number of prices consumers compare.
Better off without them?
To analyse whether or not we’d be better off without price comparison websites, I created a mathematical model that compares a world with and without them. In determining which world consumers do better in, two key variables emerge: the number of price comparison websites, and the number of them that consumers check. In general, if consumers only check a small number of the sites, this gives more market power to the sites, which can lead to them sustaining higher fees, and in turn leads to higher prices.
In the case where consumers who use the sites only check one price comparison website each, the result is that consumers are no better off than they would be without it. Here, they would prefer the industry not to exist.
On the other hand, if consumers checked the prices on all the different price comparison websites, competition between the comparison sites would increase and the consumers who use them would be better off with the industry.
In intermediate cases, where consumers check some but not all comparison sites, the result can go in either direction. In this likely scenario, however, increasing the number of sites can be harmful, if the number of sites people are willing to check remains the same. If consumers are checking a lower proportion of sites, this increases their market power against consumers. And, if the number of price comparison websites is high enough, then prices could rise by enough so that consumers would again be better off without the industry.
The research model is theoretical in nature. As with all theoretical exercises, some of the complexities of reality are left out. But it shows that we should question the desirability of price comparison websites and regulators should be aware of the trade-off between the ability to compare more prices and the profits these sites enjoy. More specifically, regulators may wish to seriously consider proposals such as capping the number of price comparison websites in the market or the fees they charge.
This article was originally published on The Conversation.
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Because they list prices in one place, consumers naturally prefer to use these sites rather than visiting the individual websites of different companies. As such, price comparison websites are generally seen to be working for the consumer. Any profits they make have been deemed “perfectly proper” by Tim Yeo, chair of the Energy and Climate Change Committee.
However, my research shows they may not be beneficial to consumers, who may even be better off without them at all.
Opposing forces
Price comparison websites impose two opposing forces on the markets in which they operate. On one hand, they increase competition between firms, which pushes prices down. But on the other, comparison websites make substantial profits, which they glean in a large part from fees charged to firms for referring customers to them.
As explained on Money Supermarket’s website: “Our main income is derived from customers clicking through from results pages and buying a product.” In 2013, the company experienced turnover of £225m (up 10% on 2012), with post-tax profits standing at £35m (up 40% on 2012).
This has a knock-on effect on firms. It adds to their costs and therefore affects their pricing decisions, so can lead to them upping their prices. Indeed, amid the current furore surrounding energy markets in the UK, energy company EDF stressed this in a letter to the Energy and Climate Change Select Committee. They said that these commission payments “bring additional costs that end up being reflected in higher tariff prices for the consumer”.
No guaranteed benefit
As these forces act in different directions, it is not clear that the existence of a profit-maximising price comparison website industry is guaranteed to benefit consumers. Before the widespread expansion of the internet, consumers faced substantial search costs to compare the prices available from various firms. In this context, the scope for an aggregator to benefit consumers was clearer.
Nowadays, the benefit that price comparison websites offer is less obvious. Firms and service providers have their own websites, from which consumers can find prices in a matter of clicks, so it seems reasonable to assume that consumers would check some prices in a world without price comparison sites.
What my work shows is that the sites' drive for profit means they can be detrimental to consumers, even if they increase the number of prices consumers compare.
Better off without them?
To analyse whether or not we’d be better off without price comparison websites, I created a mathematical model that compares a world with and without them. In determining which world consumers do better in, two key variables emerge: the number of price comparison websites, and the number of them that consumers check. In general, if consumers only check a small number of the sites, this gives more market power to the sites, which can lead to them sustaining higher fees, and in turn leads to higher prices.
In the case where consumers who use the sites only check one price comparison website each, the result is that consumers are no better off than they would be without it. Here, they would prefer the industry not to exist.
On the other hand, if consumers checked the prices on all the different price comparison websites, competition between the comparison sites would increase and the consumers who use them would be better off with the industry.
In intermediate cases, where consumers check some but not all comparison sites, the result can go in either direction. In this likely scenario, however, increasing the number of sites can be harmful, if the number of sites people are willing to check remains the same. If consumers are checking a lower proportion of sites, this increases their market power against consumers. And, if the number of price comparison websites is high enough, then prices could rise by enough so that consumers would again be better off without the industry.
The research model is theoretical in nature. As with all theoretical exercises, some of the complexities of reality are left out. But it shows that we should question the desirability of price comparison websites and regulators should be aware of the trade-off between the ability to compare more prices and the profits these sites enjoy. More specifically, regulators may wish to seriously consider proposals such as capping the number of price comparison websites in the market or the fees they charge.
This article was originally published on The Conversation.
