Individual advantage; collective cost

Tweet Last week, it was reported that those customers of the energy companies who switch suppliers regularly can end up paying around £200 a year less than those who remain loyal to one supplier.  The reaction was somewhat predictable, with calls for the non-switchers to joint the tide and switch.  Some of yesterday’s papers even included large adverts, paid for by the Government out of our money, telling us that they’d made it easier to switch and encouraging more of us to do so.

There are, of course, always likely to be some customers who don’t switch, no matter how easy the companies and government make it.  They will tend to be the elderly and the vulnerable.  They are the ones who are most likely to lose out in a market place which pays a premium to those who are willing and able to spend the time and effort shopping around.  The best that fanatical fans of ‘the market’ can hope for is that this number reduces; it is unlikely ever to reach zero.

But I’m not sure that it’s really as simple as encouraging people to switch anyway; it looks to me like one of those situations which appears to make sense individually but is crackers collectively.

In setting their tariffs, and particularly the difference between their tariffs for current customers and their tariffs for new customers, the energy companies are always trying to strike a balance which maintains what they consider to be a reasonable level of profit.  (Whether the profits are reasonable or not is another issue entirely, and not one for today.)  Does anyone really believe that they are going to allow their overall profit to go down if 100% of customers switch annually, so that they’re all on the ‘new’ customer tariff?  Of course not; the effect ultimately would simply be to erode the difference between ‘new’ and ‘existing’ customers’ tariffs, with the ‘average’ tariff close to where it is now in order to maintain current levels of overall profit.  Having a lower tariff to attract new customers only pays off as long as only some customers switch; the greater the proportion who do switch, the lower the premium for doing so would become.

So, if we suppose for a moment that the government were to succeed in its efforts to get everyone to switch regularly, what would the result be?  The answer is that we’d all be paying pretty similar tariffs (so the difference in price would be diminished, even if not entirely eliminated); the average tariffs would be similar to the current average, with smaller deviations from the norm; the energy companies would have a complete infrastructure dedicated to handling a 100% turnover of customers every year (something which is likely to increase their costs); and we as customers would have to spend time every year deciding to whom to switch next.

What exactly is the collective advantage of doing that compared to the simpler expedient of protecting those least able to shop around by outlawing the practice of giving a preferential deal to new customers?