MEMO/08/70

Brussels, 31 January 2007

EU Consumer MarketWatch. Questions & Answers

SECTION 1: WHAT IS CONSUMER MARKET WATCH?

Consumer MarketWatch is a new EU instrument to investigate markets from a consumer perspective to assess if they are functioning effectively for consumers – or if further investigative or corrective actions are necessary.

The MarketWatch process will analyse the Single Market in 3 dimensions:

• (1) Sectoral Consumer Investigations: MarketWatch puts in place a new process to launch sectoral consumer investigations - screening the broad performance of markets across the economy against a range of indicators (price, complaints, switching, safety, satisfaction) from a consumer perspective and then identifying problem sectors for in-depth investigation. It also puts in place two important benchmarking exercises which can also trigger follow up actions.
• (2) Benchmarking EU-wide Retail Market Integration: To monitor performance across the EU in terms of the degree of integration of the retail internal market using data on cross border trade,
• (3) Benchmarking the national consumer environment: To monitor the environment in 27 national markets in terms of enforcement, information, education and redress.

At the heart of the process is the annual Consumer Markets Scoreboard published each year. This is the first critical step in the MarketWatch process – it screens all three dimensions of the market against a range of key indicators (see below). On the basis of the scoreboard screening a range of follow up actions could be envisaged.

SECTION 2: WHAT IS THE CURRENT SITUATION?

There are already instruments for market investigation in the Commission. DG COMP does sector inquiries on the basis of Competition legislation and other DGs have undertaken sectoral analyses. They have typically emphasized the business environment and have relied on company information.

For example: the DG COMP energy sector inquiry focused on the functioning of the wholesale sector (company to company). There was no inquiry into the actual situation for consumers at retail level.

Lately, the focus on consumers has increased: DG COMP retail financial sector inquiry looked at prices and conditions for consumers. But there is little data available as only the banks' information is used. No information was gathered on the problems as experienced or perceived by consumers.

There has long been an assumption that if we set the right conditions for suppliers, everything will go well:

If we liberalize the energy markets or telecoms, consumers will benefit from the most efficient suppliers

If we allow firms to compete, consumers will get the best possible outcome

If we remove barriers for cross border trade, this trade will naturally occur

Due to this, competition policy focuses on ensuring that firms do not hinder the ability of competitors to enter the market and compete efficiently. For instance, they will not let a dominant firm like a Microsoft tie products to its operating system in order to limit the extent of competition.

Equally, the internal market policy ensures that barriers to the internal market are removed for businesses so that they can establish themselves or market their product in another country. Regulatory barriers that prevent trade or establishment are removed.

SECTION 3: WHAT IS THE PROBLEM?

Evidence is mounting of market problems in markets where supply side issues are being ‘resolved’, for example:

• The Commission and national telecoms regulators have seen persistent high prices in some market segments of telecoms where services are delivered across borders (international roaming). This brought, in June 2007, the EU Roaming Regulation that reduced the cost of voice roaming abroad by 70 % for consumers in the EU.
• In Portugal, over 90% of subscribers do not use the tariff that minimizes their mobile communication expenses^[1]. On average, consumers waste over 100 euros per year. Moreover, on average, even the consumers who said that they did not wish to change operator would save between €52 and €106 per year, depending on the operator. The figures mentioned above mean that, even without changing operator, consumers could save over 700 million euros a year if they used the most appropriate tariff for the use they make of their mobile.
• We have seen confusion in energy markets where consumers have a hard time understanding and comparing offers and therefore do not switch. A study in the UK showed that between 20 to 32% of people who switched suppliers in 2000 after the liberalization of the energy markets actually switched for worse contracts.^[2]
• Consumer organizations report that the prices of digital cameras can vary up to 30% even between neighbouring countries.^[3] How do we reconcile this with a supposedly 'single' market?

Why now?

In recent years, parallel to deregulation and higher competition policy standards, a range of practices seem to be evolving in different sectors at the retail end of the market which might distort consumer choice and behaviour and might act as indirect barriers to competition.

For instance, we have seen an increase in the confusion of consumers about the prices they are offered or pay

We have seen strategies of obfuscation or complex pricing that impairs consumer’s ability to make an optimal decision (mobile phone contracts, financial contracts)

We see commercial practices that exploit behavioural biases to distort consumer choice (teaser offers, tying and bundling smaller services consumers pay little attention to when they make a big purchase).

Competition policy cannot address these issues when they are collectively (and tacitly) adopted by the industry. Competition policy is restricted to act only in cases where a dominant firm is found to abuse its position or when companies are explicitly colluding. It can do nothing against pervasive practices that are detrimental to consumers in a market without a dominant player, or express collusion.

In addition it is clear that the retail dimension of the EU Single Market is not fully integrated - this denies consumers more competitive offers and more choice. ^[4]

SECTION 4: WHAT IS THE NEW PROPOSAL? HOW WILL THE NEW MARKET WATCH PROCESS IMPROVE THE INTERNAL MARKET?

The process

There are three main parts to the MarketWatch process: the sectoral consumer market investigations, the benchmarking of the internal market, the benchmarking of the consumers environment.

(1) THE SECTORAL CONSUMER MARKET INVESTIGATIONS

There are 2 steps in the new consumer market investigations.

• Screening: The new Consumer Market Scoreboard is the first step in the process. The Scoreboard looks at five top-level indicators used to screen markets –
• Complaints: Complaints provide first hand bottom up feed-back on markets and is an important indicator. We are working towards developing a standardized methodology to classify complaints to build an EU wide database. The evolution of complaints in a sector over time will be monitored Keeping in mind that a high level of complaints can be indicative of a problem in the market but also of a very good complaint handling system!
• Prices: Prices are of direct concern to us all. They tell much about the reality of the internal market. They are also the expression of market conditions and an indicator that a part of the market may not be working smoothly. Wide and unexplained price disparities of tradable or comparable goods and services across countries will have to be investigated. The price evolution on deregulated sectors will be watched closely.
• Switching: is a very good indicator of the dynamism and level of competitiveness in a market. We expect firms to compete for customers and customers to choose better offers when these become available. Firms sometime try to prevent customers from switching by giving them contracts with long durations or by tying the supply of one product to the supply of other products; so that the consumer cannot just change one of them. We also look at the degree to which consumers can compare offers, an essential condition for them to make good choices.
• Satisfaction: complements the data on complaints, taking into account also the views of those who did not complain. Measures are complex to design but may provide a good overall assessment of how consumers perceive a market. We are currently using a measure that combines several dimensions of satisfaction: prices, quality, image.
• This measure has proven useful to identify particular markets that present a problem in a member state. Also, it will be useful to track the evolution of this index in markets subject to changing conditions.
• Safety: Indicates the most important sources of risks in the internal market.

In themselves, these indicators are not evidence of malfunctioning but they are useful signals that something may not be working in a market. They will point to consumer markets that have a higher risk of malfunctioning and need further analysis.

• Sectoral Investigation+ remedies: In those sectors picked as risky in terms of malfunctioning for consumers, an in-depth, market specific analysis can be carried out that will identify the reasons behind the failures. This will allow us to put forward appropriate policy remedies.

(2) BENCHMARKING RETAIL MARKET INTEGRATION

After more than 15 years of developing the Internal market, it is clear that retail markets for consumers are not fully integrated – in fact, many markets remain fragmented along national borders, creating 27 mini markets instead of a pan-European supermarket. Whilst 27% of Europeans shopped online in 2006, only 6% did so cross border.^[5]

This denies consumers access to better offers and more choice.

The Scoreboard will assess the degree of retail market integration using indicators on the data on cross border trade. It will also explore the reasons behind consumer reticence to shop cross border and exploit the EU wide potential for distance selling, especially e-commerce.

The Scoreboard looks at:

• Volume of cross-border shopping / trade
• Cross- border complaints, disputes, information requests
• Attitudes of consumers and SMEs towards internet and cross-border shopping
• Presence of non-national retailers in the national markets

(3) BENCHMARKING THE CONSUMER ENVIRONMENT

Benchmarking the consumer environment in the Member States

Benchmarks are needed to better understand the consumer environment at national level. A lack of resources for consumer organisations, poor consumer confidence, inadequate enforcement measures to deal with consumer problems, or consumers experiencing problems and being dissatisfied with the handling of their grievances, as compared to the situation on other Member States could indicate problems.

Indicators we are looking at are:

• Enforcement of consumer legislation
• Redress
• Consumer empowerment (including education, information, consumer organisations, trust in the system)

This part of the exercise is a real benchmarking process by which Member States must assess whether the consumer environment they have set up is satisfactory or whether they need to take measures to improve the ability of their consumers to elicit the best possible outcomes from markets.

What are the instruments available?

There is a wide range of remedial actions that will vary by market and issue to be resolved. There are five main tools to resolve market malfunction:

• Enforcement of existing legislation: probably the most efficient one when legislation already exists that can address the issue at stake. This may require clarifications regarding the scope and application of legislation.
• Information: empowering consumers with clear and manageable information to help them chose, exercise their rights, and spot and avoid fraud and deception
• Codes of conduct with industry: when possible a targeted code of conduct discouraging or encouraging business practices will be the less intrusive way to resolve an issue.
• Regulatory actions: for systemic problems in particular sectors that cannot be addressed by lighter remedies, regulatory intervention might be necessary.
• Competition action: when the market is working badly because of the conduct of an abusive firm or group of firms, competition authorities will be able to enforce competition policy and resolve the case.

As the screening and investigation processes develop and evolve new remedies at EU or national level to correct particular situations may also evolve.

Does this kind of process exist in other Member States?

To some extent: the UK, Italy, Denmark, Netherlands all have different kinds of process for screening consumer markets.

• In Denmark an annual index of consumer condition is published for 57 markets which are rated in relation to each other.
• In the Netherlands a scorecard for risk at market failure is developed for several markets based on 9 indicators, one of which is consumer complaints. The sectors that appear problematic from the scorecard are further analysed in order to examine where the problems lie.
• Prices are also monitored closely in most Member States. For example, Italy has a price observatory.
• The mission of the Office of Fair Trading (OFT) in the United Kingdom is to make markets work well for consumers. The OFT uses complaints as a prime indicator of market failure. The OFT actively investigates markets that do not appear to be meeting the needs of consumers and publishes the results of these inquiries.

The Federal Trade Commission in the US has also developed a large complaint database (670.000 complaints in 2006) called the Consumer Sentinel that centralizes complaint data gathered by the FTC and 115 other organizations. Thanks to this database they can rapidly respond to violations of the legislation.

^[1] DECO/PRO TESTE, February 2005.

^[2] 'Do consumers switch to the best suppliers?' Chris Wilson and Catherine Price, CCP Working paper May 2006.

^[3] Test d' Achat, December 2007 (Belgium)

^[4] By retail market we mean the final link in the supply chain when the retailer sells the product to the final consumer.

^[5] Whilst languages and familiarity with local suppliers explain some of this, it turns out language is not a prohibitive factor for a large part of consumers: 32% of respondents would be prepared to purchase goods and services using another EU language (ranging from 85% and 69% for Luxembourg and the Netherlands to 18% and 20% for Hungary and Ireland).