Competition when firms can confuse consumers: A primer on some ongoing research

January 15, 2014 Leave a comment

I felt like giving a little primer on the results of an experiment that Paolo and I did in December, about the incentives for firms to confuse consumers. I was motivated by seeing the following recent article in JEBO:

“Consumer Myopia, Competition and the Incentives to Unshroud Add-on Information” by Tobias Wenzel
http://dx.doi.org/10.1016/j.jebo.2013.12.002

As in most (all?) articles on shrouding, this paper considers only the one stage game and finds as usual that firms will want to make their prices transparent… while ignoring the impact of collusion.

Yes, I did the same thing in my paper in Economica with Bob Sugden on spurious complexity and common standards (http://dx.doi.org/10.1111/j.1468-0335.2011.00895.x). But now, from a recent experiment with Paolo Crosetto where we test a similar model in the lab, we found that firms were quite able to collude not to unshroud after experiencing the horrors of an unshrouded equilibrium!

I am excited about writing up the results, as in fact, being able to choose to make prices transparent or not can help collusion compared to a standard setting with no possible shrouding, and this in two ways: by serving as a signal that one wishes to make peace with others, and also by making the punishment phase harder on those who deviate and unshroud. Once said, this looks obvious now, but I guess this has been missed by others than us, so I don’t feel so bad about missing it.

I will be working in the next month or so on writing up the results, but I am now busy finishing writing a paper on the relation between exit costs and incentives to exit in a repeated version of the public good game with imperfect public monitoring and stochastic outcomes. Very interesting, but it has been hell to find the correct perspective in writing about the experimental findings.

Social preferences under uncertainty. An experiment

In his short story “The Lottery in Babylon”, Borges imagines a city where a lottery, managed by a secret society, mandates the fate of its citizens. Every sixty nights, drawings are made and determine each citizen’s fate until the next drawing, and this with “incalculable consequences”. Like the narrator, one might end up a proconsul, or one might end up a slave… until the next drawing, unless of course the draw mandates death!

This is one extreme example of enforced social mobility of course, but the author, intriguingly, ends the story by saying that the lottery has become so much part of life in Babylon that one is not any more sure it even ever existed. Could our lives also be determined by a secret society of Fates?

In our more prosaic lives as well, chance, or misfortune, can befall any of us without warning. While one may think one’s in control of one’s destiny, a lot of our decisions have unpredictable consequences. Yet, one must decide one way or the other. In most of the literature on decisions in a risky setting, chance only affects oneself. However, more recently, some authors have started to investigate the social dimension of risk, that is, whether perceptions of a risk may be affected not only by how that risk affects oneself, but also by how it affects others (Bolton and Ockenfels, 2010Brennan, González, Güth and Levati, 2008Charness and Jackson, 2009Güth, Levati and Ploner, 2008Bradler, 2009Harrison, Lau, Rutström and Tarazona-Gómez, 2013Linde and Sonnemans, 2012Rohde and Rohde, 2011)

This matters because people are sensitive to how their wealth compares with that of others, so that a catastrophe that affects all in the same way, such as a tsunami in a coastal city in Japan, will have a different impact than a risk that affects only oneself, such as when one’s house burns down.

In a new working paper, Social preferences under uncertainty, I decided to investigate how individuals consider different types of social lotteries by using the simplest experimental design I could think of. I got a number of experimental subjects (humans of the student variety) to choose between different allocations of wealth between themselves and an anonymous other, some of those allocations being subject to chance.

The main variables I was interested in were as follows:

  • If the allocation is subject to chance, does a bad outcome for me (low payoff) also mean a bad outcome for the others?
  • If there is an alternative to risk, such that I can get a payoff for sure and the other as well, does that safe alternative guarantee me as much as the other, less, or more?

I was expecting, based on earlier literature, that correlation in payoffs (the first aspect) would not influence choice that much. That actually did not fit with my intuition, as I thought people would dislike negatively correlated social payoffs most. I also expected that people would be more ready to take risk if that meant avoiding a safe but subordinate alternative. Because many people do not like inequality even if it favours themselves, I also expected people would be more ready to take risk to avoid dominant safe alternative, maybe out of a sense of fairness.

In the event, I did find that people did not like their payoffs to be correlated with that of others, though the effect was small, and that they indeed did not like inequality in terms of the safe alternative. This means for example they were likelier to choose a risky but fair lottery giving expected payoff of 45 ECU for both when the alternative was a safe but unequal payoff than when it was a safe and equal payoff.

The issue is that while dislike for correlated lotteries can be explained through altruism (people do not like others to bear risk even if themselves do bear risk), dislike for unequal safe payoffs can be explained through inequality aversion, which goes against altruism in some cases. Indeed, altruism mandates preferring higher payoffs for the other no matter what, while inequality aversion means that one prefers the other to have less if the other has more than oneself!

This generates some issues in the generalization of the social preferences as modeled in Fehr and Schmidt (1999) or Bolton and Ockenfels (2000) and in a lot of the literature on choice in social settings, as one cannot be at the same time altruistic and inequality averse. Why were people not happy for the other to obtain a higher payoff than themselves in the safe lottery? Among others, Brock, Lange and Ozbay (2013)Cappelen, Konow, Sørensen and Tungodden (2010) and Krawczyk and Le Lec, (2010) in particular suggested fairness considerations had to play a role. I used a suggestion in Fudenberg and Levine (2012) whereby utility would be a mix of utility for ex-ante, expected payoffs and ex-post social outcomes from the lottery. I later found out this idea was used in recent theoretical papers by Krawczyck (2011) and Saito (2012).

The formula for utility of lottery L=(a,\frac{1}{2};b,\frac{1}{2}) takes the form U_{L}=\lambda(\frac{1}{2}u(a)+\frac{1}{2}u(b))+(1-\lambda)u(\frac{1}{2}a+\frac{1}{2}b)

that is, utility is \lambda times the expected utility of the lottery, with the utility of different outcomes possibly influenced by the utility of the other in that situation, so u(me,you)=u(me)-\alpha|u(you)-u(me)| for example, plus 1- \lambda times the utility of the expected value of the lottery, maybe influenced by the expected value of the lottery for the other.

An individual would thus judge a lottery along two dimensions: Is it fair? Are the outcomes correlated or not with those of the other? I did find that people’s choices were consistent with them putting a high weight on ex-ante fairness (1-\lambda high), but also taking account of the type of risk borne in the lottery. However, I was still not able to reconcile subjects’ preferences among lotteries with my modelling, suggesting that maybe individuals do indeed have different social preferences under risk than under certainty.

In terms of experimental methods, one of my issue with standard ways to elicit preferences is that, when offered the choice between two lotteries, subjects can generally only say: “I prefer this one”, or “I prefer this other”, but not by how much. Some experiments allow people to express indifference, and some, such as Connolly and Butler (2006) ask people to express the strength of their preferences or emotions associated with a lottery, though not in an incentive compatible way. Peter Moffatt in his excellent book Experimetrics (forthcoming at Palgrave Macmillan ) explains how far the expression of strength of preferences can indeed be used to refine estimates, but as he mentions along Grether and Plott (1979), “task related incentives are the bedrock of theories under test”, so that tests of theories “cannot be taken seriously in the absence of non negligible task-related incentives”. I therefore had the idea to make people pay to increase the probability to obtain their preferred lottery. In principle, they would pay only up to the point where their preferred lottery minus the price would be indifferent vs. the less preferred lottery. I think I am the first to implement such a system, which ended up working quite nicely, and allowed me to have more precise and robust estimates of subjects’ preferences (see the econometric section). However, this made the experiment more difficult to understand for subjects.

Another issue I had with other experiments on the topic was how the choices offered to the subjects looked too much like each other so that subjects could quite easily apply decisions made in one setting to another setting. For example, if they keep being offered a lottery that gives either 20 or 80 with probability ½ and ½, while the payoff of the other varies between choice instances, then they might just economize on the thinking cost and always make the same decisions without considering the payoff of the other. I therefore randomized payoffs in my lotteries, at the cost however of not being able to compare decisions directly across different situations, and therefore having to adopt a parametric approach to identifying subjects’ preferences (i.e. postulating a model of choice, estimating its parameters and looking at its consequences in terms of choice among different types of lotteries).

For more details, the paper is available at SSRN and at RePEC.

Presentation of a new paper at the ESA in Cologne

September 17, 2012 Leave a comment

 

Paolo Crosetto was kind enough to make the above presentation on my behalf at the ESA European conference in Köln this year. I was not able to make it but was kept on the program so, learning this the day before, we jumped on the opportunity and I wrote the presentation in an afternoon.

The presentation is of a paper we just released on SSRN and RePeC as a Jena Economic Research Paper. The title is “Partnerships, Imperfect Monitoring and Outside Options: Theory and Experimental Evidence”.  We designed an original game inspired by literature on public good production, moral hazard and team work. Instead of joint effort translating into some amount of production, joint effort only determines how likely you are to get a reward.

This little change means that issues of imperfect monitoring of the action of others are prevalent in our model. For example, working on a paper, you cannot be sure that failure to get the paper accepted at a top journal was due to lack of effort of your partner or to bad luck (of course, it cannot be your fault!). We think such issues are very important to the sustainability of group work, especially when, as is now so often the case, participants are not in the same place and meet only irregularly.

We got a number of subjects to play the game and found that they displayed a distaste for team work in so far as they choose to exit joint production more frequently than would be efficient. More precisely, they chose to work on their own even when they did believe it would be more efficient to work jointly with their partner. We also found that, unlike in the experimental literature on public good production, they did not seem to vary their effort in joint production as a function of what they expected others to do. Their behavior was of the form: exit joint production if unhappy, stay and keep doing the same if satisfied. Overall, we found that better outside options were detrimental to social welfare, meaning that agents, once committing to team work, were better off being restricted in the range of outside options available to them. This prevented them succumbing to the temptation of leaving the team.

 

Presentation at the 13th Annual Conference of the APET in Taiwan, 2012

I was at the 13th Annual Conference of the Association for Public Economic Theory last week. It was organized this year by the Institute of Economics at the Academia Sinica, which is in Taipei, Taiwan. I presented my paper with Caterina Giannetti on the role of reciprocation in the formation of social networks, which uses data from blogging networks. We will soon release a new version of the paper that expands on the work we did since last version. Indeed, we worked on explaining better the contribution of the paper, how dynamic analysis differs from static analysis, the robustness of our empirical results, and their practical implications, notably in terms of the long-term effects of changes in activity over time.

Our paper was part of the very well attended session on public goods and networks, which took place on June 14 and was organized by Nizar Allouch. It seems the topic is interesting to many! I found the conference very interesting overall as I always found a good session to attend. The contribution by Steven Durlauf was particularly interesting for me, essentially about issues with the econometric identification of linear social network model. I also liked the session on behavior in health systems, useful in guiding the design of health policies and programs, the session on political economy, notably an interesting paper presented by Maria E Gallego, and a final session on public good provision, especially a paper by Nobue Suzuki dealing with how free exit affects public good provision (not available online though).

The conference itself was well organized. We had buses picking us up directly at the hotel to bring us at the venue, the food was quite good, and every sessions took place in the same building. It was the first time I went to an APET conference, and there were papers of a good level on a wide diversity of topics. A particularity is how Europeans, Asians and Americans all participate there in about equal number. I found that very refreshing as other conferences tend to have much less varied of a mix. I enjoyed the gala dinner on the second day. I was seated at the “French table”, which gave me some insights on the situation “back home”. We were treated to a huge variety of dishes, all more interesting than the other :-P. This was preceded by a visit of the National Palace Museum and its collection of perfect objects from Imperial China. I recommend going to the tea room at the top, with very nice views on the surroundings!

Leaving GSBC :-( Joining MPI :-)

May 28, 2012 4 comments

This week is my last week working at the GSBC (University of Jena) and from next week onward I will be working at the Max Planck Institute of Economics, also in Jena.

I am very happy of course to join Professor Werner Güth‘s Strategic Interaction research group, but I will really miss working at GSBC as well. I was very happy to work there and I am particularly thankful to Professor Uwe Cantner, director of the GSBC, and to Dr. Kristina von Rhein, who was the research coordinator at GSBC for most of my stay there. They both took very good care of me and I have been very happy working with them!

During my stay at GSBC, I got 3 papers and one book chapter published (here, here, here and here). I also worked with Caterina Giannetti, Paolo Crosetto and Gerhard Riener on a total of three research papers, two of which are now under submission (here and here).

I went to a number of international conferences (EEA 2009, EARIE 2011 and Econometric Society 2011), workshops (ACLE 2012, Crem-Economix 2010), participated in two excellent summer schools (at the MPI of Economics here in 2009 and at the MPI for Human Development in Berlin in 2011), organized a workshop on the economics of open source software in 2010 (with Kristina von Rhein and Sebastian von Engelhardt), and had great fun organizing a hand-on introduction to experimental economics with Paolo Crosetto at last year’s Night of Science in Jena (people played our experiment, introduced with a poster here).

The PhD programme at GSBC is certainly a program I would rank highly in terms of the quality of the research environment being provided there. There is a summer schools every year (in a castle, no less!), where PhD students present their work and train their techniques (link for two years ago). There are seminars every week with presentations by external presenters, and a school day every year on a specific topic (this year about migration). There are also research assistants available (I was in charge of that along with Kristina), money for going to conferences, and last but not least, advanced courses in a variety of specialized fields (see here for current list). I was particularly impressed by the very good courses in econometrics and experimental methods being led by Professor Oliver Kirchkamp, but there were also courses in a variety of other topics. Econometrics is certainly something I started to more or less understand only since I came here.

The crowd of PhD students in floors 1 and 3 of the building at Bachstrasse 18k, where the GSBC resides, is also quite impressive. There are not only PhD students from the GSBC, but also from the EIC, which specializes on the economics of innovation, and from the IMPRS, which focuses on decisions under uncertainty. Students come from the Czech Republic, Poland, Italy, Chile, Brazil, Nigeria, China, India, Pakistan, Iran, United States, Russia, Netherland, Ghana, Belarus, etc… There are even some Germans there! Each of those schools has its own research presentations, seminars, summer schools, courses… which means that there is always something new going on, always interesting seminars to attend, and many opportunities to socialize as well!

So anyway, I am remaining in Jena and will keep on benefiting from its very good research environment, especially given the excellent interplay between the Max Planck Institute and the University. For my work at the MPI, I plan to collect a new, more detailed panel dataset on the activity of bloggers to keep on refining my work with Caterina Giannetti. I also am working on two ideas for experiments, one following on my paper with Paolo Crosetto, the other dealing with the perception of fairness (details still secret!). This should keep me busy for a while!

Presentation at the ACLE workshop on Behavioral Competition and Regulation

April 23, 2012 1 comment

I had a truly good time in Amsterdam this week-end. I was at the Amsterdam Center for Law & Economics (ACLE), which organized its 8th Annual Competition & Regulation Meeting.

Part of the workshop took place at De Industrieele Groote Club, a very luxurious environment with wide comfortable chairs for wide, comfortable industrialists!

The theme this year was Behavioral Competition and Regulation, and I presented my paper with Paolo Crosetto on whether consumers prefer offers that are easy to compare (link).

A number of interesting papers were presented (see list here). Botond Köszegi looked at markets where some consumers are vulnerable to firms’ deceptive strategies (link) and showed that the use of deceptive strategies is particularly likely to survive in socially wasteful industries.  Maurice E. Stucke discussed how to integrate insights from behavioral economics into competition policy (link), and underlined how following the rule of reason could weaken the rule of law when dealing with competition cases.

There were a number of interesting experimental papers as well. Among those, Giancarlo Spagnolo investigated whether collusion is helped or hindered by the speed with which one can react to deviations from the collusive agreement (link) and Jona Linde  discussed how nudges can lull consumers into not paying sufficient attention to the choice tasks at hand (link, paper joint with Thomas de Haan, who now works here at the EIC).

In most of my conversations there, I tried to push the idea that we should also get rid of the assumption that firms are behaving honestly vis-à-vis consumers. That is, we generally assume that a contract, once signed, will be respected, and that there is an inherent “true”, correct way to interpret a contract. This may hold in well-regulated societies, but does not apply well much further.

I am therefore interested in work on ambiguous contracts, how their interpretation will depend on the relative strength of the contracting parties, and how far they can divert from short-term self-interest.

Why learning economics is of no use, or how Flexstrom managed to fleece me

April 12, 2012 2 comments

I had a really interesting experience dealing with Flexstrom (http://www.flexstrom.de), a German electricity provider. Flexstrom attracts customers with low prices for electricity supply, combined with the promise of a bonus after one year.

1. The story

I switched to Flexstrom from the city provider, Stadtwerke Jena (http://www.stadtwerke-jena.de) on the 1st of April 2010. Prices at Stadtwerke were of about 9 euros per month plus 0.23 €/kWh so that my expected expense for the year, given my consumption of about 2200 kWh per year, was 611 euros.

Flexstrom’s offer was much more advantageous: Their price was of 0.175 €/kWh, which, combined with a monthly fee of €7.70, meant I would be spending 477 euros for the year. Not only this, but I would receive 100 euros back if I kept on with the company after this (see note 1 whereby I was made to believe this would be paid even if I left).

This looked like a really good deal: even if I did not stay with Flexstrom after one year, I still saved 133 euros compared with my contract with Stadtwerke Jena (see table).

Starting date Contract Price / kWh Monthly payment Consumption (KWh) Yearly expense
28.09.2009 StadtWerke Jena  € 0.229  € 8.93 2200  € 611
01.04.2010 DeutschlandsBest Tarif 2  € 0.175  € 7.70 2200  € 477
01.08.2010 DeutschlandsBest Tarif 2 Regio (Zone 6) BK  € 0.226  € 8.70 2200  € 602
01.04.2011 DeutschlandsBest Tarif 4 Region 23  € 0.254  € 9.50 2200  € 673
01.04.2012 DeutschlandsBest Tarif 4 Region 23  € 0.272  € 9.50 2200  € 713

However, Flexstrom guaranteed the price only for the first 3 months, and, surprise, 4 months after the start of my contract, I received a letter stating that prices would be increased on the 1st of August for the remainder of the year (see table for the new prices). It turns out this was not a perfectly legal move on their part (see http://de.wikipedia.org/wiki/FlexStrom#Rechtsstreite_seit_2011), but as a newcomer in Germany I did not know this.

My projected expense for the year was now about 560 euros. I still would make savings compared to my contract with Stadtwerke Jena if there was no further raise in price. However, this was not to be. Flexstrom raised its price again at the beginning of the second year (see table) so my expenses for the second year would be 673 euros.

At that point, I contacted Flexstrom to change my contract to one of their better offers, which I had found via a price comparison engine, Verivox (http://www.verivox.de). They emailed back to me that they would forward my request to the appropriate person in their company (see note 2 for their wording).

I waited and came back to them after a while, at which point they told me it was actually not possible to change my contract. Not only this, but it was now too late to cancel it, so there I was, stuck with Flexstrom for a second year.

I immediately sent them a letter to terminate my contract so it would at least not be prolonged into a third year. This was with good reason: the price I would have paid for my third year would have resulted in expenses of 713 euros (see table), compared to the 480 euros I will (hopefully) be paying this year with my new provider.

To recapitulate: I spent 560 euros for the first year, to be compared with the 480 euros that were originally contracted for and the 611 euros I would have paid at Stadtwerke Jena. I received the one year 100 euros bonus at the end of the first year and spent 672 euros in the second year. This means that, over two years, my expense was of 1133 euros, or 567 euros per year. I therefore still managed to pay slightly less compared to what I would have spent at Stadtwerke Jena, but much more than I was led to expect, and probably more than if I had chosen a more honest competitor.

2. Interpretation

The way I interpret this is as follows: Flexstrom undercut Stadtwerke Jena so as to attract me as a new customer. I switched to them because, even if they raised their prices after one year, I could still switch out of them and make savings even if that meant the one year bonus would not be paid.

The mistake I made was not to cancel my contract with them when they increased their prices after four months. At that point indeed, their prices were not competitive any more, and it was only the prospect of getting the 100 euros bonus that kept me in. My second mistake was not to pursue my request to change my contract with them more forcefully. They cleverly delayed responding until it was not possible for me to change provider, and then advised me that I could not change contract.

Flexstrom’s strategy can thus be summarised as follows: attract customers with advantageous prices and a one-year bonus, raise prices as soon as “legally” possible, discourage customers from leaving after one year through a combination of delay and obfuscation when dealing with customer requests, and finally, recover the money lost in the first year by raising prices above the competition in the second year.

3. Analysis

Flexstrom makes very fancy footwork indeed, which I analyse below in terms of the academic literature on the topic. Let us begin with Farrell and Shapiro’s “Dynamic Competition with Switching Costs” (1988).

The difference between my case and Farrell and Shapiro (1988) is that they assume the firms cannot discriminate between old and new customers, while Flexstrom proved perfectly able to identify me as an old customer when I tried to change my contact via a price comparison engine (I tried this twice, it did not work, see note 3!). Secondly, switching cost with Flexstrom are not so much due to the difficulty in switching provider (one has to take care of this three months in advance, but this is eased by the use of price comparison engines). Switching is made costly because the payment of the one-year bonus is conditional on contract renewal. Switching out meant losing the one year 100 Euros bonus in my case (again, this was not clear when I first signed the contract, see note 1).

Flexstrom’s strategy is better described in Klemperer (1995) on page 535, where he makes the clever point that “committing to give some consumers a future discount is not directly costly in the absence of any commitment to future prices”. In lay terms, it is easy for the firm to raise its prices in the second period in order to recover the cost of the bonus. This is exactly what Flexstrom did.

Klemperer (1995), with this quote, directs me back towards section 3 of Caminal and Matutes (1990), where it is stated that such bonuses (“coupons” in their terminology) “decrease the competitiveness of markets”. Interesting, but one would have to rework a bit their model to look at the case where one firm (in my case, Stadtwerke Jena) decides not to offer any bonus. Also, Caminal and Matutes (1990) consider a Hotelling location model, that is, they assume there is differentiation between products, which is not the case with electricity.

After a bit of research, I found a reference that is a really good fit with my situation: section 4.4 of Fong and Liu (2010), which deals with repeat-purchase discounts. They state in their paper that what they call “loyalty rewards” are a collusion device, that is, their use is anti-competitive. Whether Flexstrom, and more generally German electricity companies, should be banned from offering rewards for old customers, is something that the German competition authorities (http://www.bundeskartellamt.de/) should pay attention to. I do not see any indication that this is on their radar.

4. Extension

One thing missing from most of the economic analysis of such situations, in my opinion, is their behavioural aspect. I suspect that many customers, like me, did not understand that the one-year bonus was a loyalty reward, payable only in the second year if the contract was renewed. Rather, they incorrectly subtracted it from their first year expense when making comparisons with offers at the competition (see note 1).

On this matter, price comparison engines may not be making their job properly. While Verivox (http://www.verivox.de) seems to now have excluded Flexstrom from its listings, it appears to let other companies, such as Stromio (http://www.stromio.de), advertise new customer bonuses as if they were not conditional on renewal. For example, Stromio now advertises contracts with a 25% rebate on the total expenses paid after the first year. However, when reading the contract, I noticed that this rebate would be repaid on expenses in the second year, which is not not how Verivox described it, instead stating that this would be reimbursed at the end of the first year (see note 4 + note that Verivox disagrees with my interpretation). Other price comparison engines are worse. For example, StromVergleich (http://www.stromvergleich.net) still lets Flexstrom get to the top of its listing by falsely deducting its bonus from first year expenses.

This means that a firm may be able to attract customers with such loyalty bonuses even while offering exactly the same price as the competition in the first year. They can do this by making sure that customers incorrectly believe the bonus is to be subtracted from their first year payment. This incorrect belief is encouraged both by the companies and by price-comparison engines which subtract the loyalty bonus from the first year payments as a default.

Missing from the models, therefore, are deceptive practices by firms. Flexstrom trying to pass a 100 euro second year rebate as a 100 euro reimbursement after one year is only one example. Flexstrom also responded ambiguously to my requests for a change of contract. As mentioned in note 3, it also pretended to be confused when I tried to select a new contract and tried to force me into a less advantageous contract instead.

Other examples of dubious practice at the moment includes the owners of Flexstrom setting up other companies (for example Löwenzahn Energie GmbH) in order to escape the reputation they have developed over recent years (see http://de.wikipedia.org/wiki/FlexStrom). I suspect they do this also in order to artificially inflate their presence on price comparison engines.

They are not the only electricity company to adopt exploitative, dishonest or misleading practices: A favourite strategy of electricity providers seem to be to give a different name to the branch of their company that offers “ecological” tariffs. Those “ecological” tariffs are yet another completely different kettle of fish that would need some serious attention, if only German regulators had any teeth.

5. Epilogue

It seems to me indeed that the electricity market in Germany lacks decent consumer protection. Overall, consumer protection seems much less effective in Germany than in the UK, where I have had good experience with the Ombudsman system and where the OFT is at least aware of and concerned about exploitative practices by firms. One seems to have to go to court to seek redress in Germany, while less extreme and less expensive solutions are available in the UK.  Flexstrom seems to have been sued successfully by some consumers (see http://de.wikipedia.org/wiki/FlexStrom#Rechtsstreite_seit_2011), but remedies were only applied to those consumers who took the time and expense to sue the company.

This means that Flexstrom has been left more or less free to profit from its deceptive and anti-competitive practices. The owners of that company, the brothers Robert and Thomas Mundt, were already accused in 2003 to have operated a Ponzi-scheme (see note 5 for more details). That they would be allowed to keep on doing business seems rather strange to me.

Notes

1. In fact, at the time, I did not know that those 100 euros would be paid only if I stayed. It seems I was not the only one to believe those would be paid at the end of the first year whether I left or not, cf. http://de.wikipedia.org/wiki/FlexStrom#Rechtsstreite_seit_2011 (in German).

2. “Ihr Anliegen zum Tarifwechsel haben wir zur Bearbeitung an die entsprechende Abteilung weitergeleitet.”

3. I tried to use a price comparison engine as an intermediary to change my contract with Flexstrom as Flexstrom did not offer any way on their website to perform such a change. Rather than simply saying the terms I had found via Verivox were not available to me, Flexstrom took this as a pretext to renew my contract with them under the old terms of the contract I had cancelled in writing beforehand! The email they sent me is available here.

I therefore had to write yet another letter to cancel a contract I had never entered into in the first place. Flexstrom made this difficult by sending me several letter with different contract number but the same terms, so that I had to cancel three contracts rather than just one…

4. Stromio’s AGB states, in §4 (1): “Sofern ein prozentualer Bonus zugesagt wurde, wird dem Kunden nach Ablauf des ersten Belieferungsjahres ein prozentualer Rabatt auf die Gesamtkosten des tatsächlichen Stromverbrauchs innerhalb des ersten Belieferungsjahres durch eine Gutschrift im Rahmen der Jahresverbrauchsrechnung gewährt.”. The term “Gutschrift” corresponds to the term “credit” in English, meaning that it may be used only on future expenses with the company. Verivox (http://www.verivox.de) however deducts this credit from first year expenses in its ranking (see screen capture here for the ranking, here for how the bonus is described by Verivox, and here for further explanation by Verivox, which professes that they take into account only those boni that are paid within the contracted period…).

Note however that Verivox stated to me that “… we are (still) convinced that “Gutschrift“ means nothing but entry on the credit side of the account. The term does not include any time connotation and does not have to be used on future purchases only. Therefore the use of the term “Gutschrift” does not imply a second year contract. This also means the tariff is compliant with our consumer protection code and correctly displayed in the Verivox energy price calculator.”

5. It appears that the Brothers Mundt were convicted of having used a system by which clients were rewarded for bringing new clients to their old company, Innoflex AG. (see https://de.wikipedia.org/wiki/FlexStrom#Sonstiges). It is interesting to note they still operate a very similar programme, “Kunden werben Kunden”, which is detailed on their own website here: https://www.flexstrom.de/kundenbereich/kunden-werben-kunden.php.

References, in order of appearance:

Joseph Farrell and Carl Shapiro (1988), “Dynamic Competition with Switching Costs”, The RAND Journal of Economics, Vol. 19, No. 1, pp. 123-137. Free access here, or on RePEc at http://ideas.repec.org/a/rje/randje/v19y1988ispringp123-137.html.

Paul Klemperer (1995), “Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade”, The Review of Economic Studies , Vol. 62, No. 4, pp. 515-539. Free access here, or on RePEc at http://ideas.repec.org/a/bla/restud/v62y1995i4p515-39.html

Ramon Caminal and Carmen Matutes (1990), “Endogenous switching costs in a duopoly model”, International Journal of Industrial Organization, Vol. 8, No. 3, pp. 353-373. No free access available, sorry. On RePEc at http://ideas.repec.org/a/eee/indorg/v8y1990i3p353-373.html.

Yuk-fai Fong and Qihong Liu (2011), “Loyalty Rewards Facilitate Tacit Collusion”, Journal of Economics & Management Strategy, Vol. 20, No. 3, pp. 739-775. Working paper version at SSRN here: http://dx.doi.org/10.2139/ssrn.1562239.

Related links

5000-Euro-Klage gegen Flexstrom” – About how Flexstrom attempts to hide price increases into promotional flyers

Neuer Tarifrechner verspricht Transparenz” – About unfair practices at price comparison sites by companies such as Flexstrom or Stromio

Flexstrom verklagt ehemalige Kunden – Schlichtung gerät zum Bumerang  - An article about how Flexstrom tries to intimidate those of its clients who go to an arbitration board to complain about its practices.

Allgemeine Zeitung – Immer das Kleingedruckte lesen – A consumer defence group makes a presentation to old people to warn them about Flexstrom’s exploitative practices.

test.de warnt vor Flexstrom und Teldafax – An article which confirms my suspicion that Flexstrom systematically increases its prices three months after a contract is signed with a customer. There is a whole list of articles on Flexstrom at Test.de here: http://www.test.de/suche/?q=flexstrom

Die dunkle Seite von Flexstrom – “The dark side of Flexstrom”, quite self-explanatory.

FlexStrom erwirkt Gerichtsbeschluss gegen Vergleichsportal – The German “justice” system comes to the help of Flexstrom and prevents Verivox from warning its customers against this company.

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