Writing skills - AS Example - 1
In Australia a consumer of electricity would save on average, AUS$1000 by switching from the most expensive to the least expensive electricity supplier. However, 30% of consumers do not switch because of the effort required and 22% do not switch because they lack the necessary information.
Evaluate possible reasons why consumers may behave irrationally. (Source – AS Jan 2021)
Possible answer: -
Before I delve into the evaluation, let me first present my basic understanding on rational decision. Rational decision is an action by the buyers that justifies the trait among them to maximize their benefits or utility out of a transaction. Here the word utility denotes the level of satisfaction achieved by a consumer after consuming a good. A rational buyer would always try to maximize his/her benefit or utility.
In the case study, it is mentioned that a consumer of electricity would save, on average, AUS$1000 by switching from the most expensive to the least expensive electricity supplier. A rational buyer would not take time to switch and then save AUS$1000 as it can maximize their benefits due to being able to buy same amount electricity at a cheaper price and use the balance to fund their other consumptions.
Anyway, whatever we have discussed above are to illustrate the behaviour of the rational buyers. But that does not mean all the buyers would like to maximize their benefits. If buyers willingly do not maximize their benefits, then they are called irrational buyers as we can see in the case that 30% of consumers do not switch because of the efforts required and 22% do not switch because they lack the necessary information.
There are some more reasons why consumers would not maximize their benefits. Those reasons are difficult to calculate the benefits, influenced by others, habitual behaviour, inertia, lack of information, framing bias, operational difficulties, perception of being valued and social status etc. Let us discuss some these points below.
Difficult to calculate the benefits – as it is hard to calculate benefits so often buyers choose the wrong options while making transactions that do not maximize their benefits. Here in this case, the electricity plans provided by the cheaper substitutes could be confusing to consumers due to complex calculations leading them unable to understand the plans easily. This may ultimately lead them not being able to calculate their benefits and switch to other supplier. Therefore, consumers are likely not to maximize their benefits.
Influenced by others – sometimes consumers are influenced by others such as family members, friends, and neighbours etc. it is possible that the colony or community they live, people there have been receiving electricity service from a particular company that is native to the local area and is preferred due to the sense of pride among the people living in the area. So the particular group of consumers might not want to alienate themselves from the neighbours which may include their family members or friends over choosing a cheaper supplier by rejecting the service from the native supplier. Consumers often avoid such conflicts because they live in a set of social arrangements where it is important for them to fit into the groups of people in the society.
Inertia – Inertia is a state of mind that reflects no real motivation or willingness to act on something to improve the situation. Sometimes consumers are vulnerable to this state of mind. As a result of the that they may know that there is cheaper option available, but they would not capitulate that opportunity due to their laziness or unwilling to go through the process of switching for that they may have to do little hard work.
Habitual behaviour – Some consumers form a habit to use services from a particular supplier for a long period of time. As a result of that habit, they do not like to switch, though the switching may allow them to save money. This states that the consumers decision to stick to the current supplier is not a rational decision.
Lack of information – it is possible that consumers are not aware of such provision of cheaper electricity services leading them to continue with their current electricity supplier by paying higher. This happens when there is a lack of information flow among consumers. Consumers in this case are likely to behave irrationally as they are unable to maximize their benefits.
Perception of being valued – Consumer always expect to be treated well in a way that their grievances are taken care quickly with compassionate attitude. It is possible that consumers feel valued with the current supplier and are afraid of being treated badly by the new supplier.
As a result of that they continue choosing the current supplier though they have to pay a little more leading to not maximizing their benefits.
Operational difficulties – Sometimes, it is not so easy to switch the electricity supplier as consumers may have to go through a difficult process to switch. This is because, in order to switch, consumers first have to apply for cutting the connection with the current supplier, which may lead to an unexpected wastage of their time due to huge paperwork before the connection is cut finally. The similar process will be repeated to get a new connection again. This operational difficulty may discourage them to switch leading to continue paying higher to the current supplier for the electricity services. As a result they may not maximizing their benefits.
Framing and bias – it is also possible that the consumers are the victims of framing by the current supplier as they (supplier) might have convinced the consumers wrongfully for their continuation with them (supplier). They might have framed consumers by emphasizing on their service benefits more than their drawbacks or service benefits of another supplier. They are likely to be successful if there is no counter strategy used by the other supplier. As a result, consumers are likely to be under the impression that the payment they are making to the current supplier is justified whereas the reality could be adverse. In such case consumers are likely not to maximize their benefits.
However, the assumptions made above to prove that the consumers are not maximizing their benefits by not switching to other supplier may not absolutely be true. In fact, consumers could be rational and can maximize their benefits if they stay with their current suppliers. Let us look through the further analysis.
Switching cost – it is possible that the cost of switching from one supplier to another could be huge that the real benefit of switching to another supplier may not be much. It is also possible that the other supplier could increase their price shortly after the switching, leaving no realization of the benefits to switch. In this case, staying with the current supplier makes the consumers` decision a rational decision.
Proportionate to income – it is possible that the area where the electricity services are provided is full of reach people with earning very high amount money per month and their current bills consume only a very little portion of their income then saving of AUS$1000 to switch other supplier will not make much sense to them. As the value of their time would be more than what they can save by switching to another supplier. Considering the value of their time and the current electricity bill compared to their income, it seems consumers decision to stick to the current supplier is a rational decision.
Additional services – it is possible that the current supplier provide a combination of services such as electricity and heater services or electricity and water services. If the other supplier is not providing such combinations, then it is likely that consumers may not switch to the other supplier. This is because consumers either have found it convenient to stay with the current supplier or they have found the price is more or less same with the other supplier. The probable reason for price to be same, could be, the current supplier charging more on electricity but less on water or heater services leaving on an average price difference to be same with the other supplier. In this case, the consumers seem to be rational though they are paying higher for electricity services to the current supplier.
Kind of electricity supply – it is possible that the current electricity provider is providing solar electricity and the other supplier is using fossil fuel to generate and provide electricity. It is also possible that the consumers in Australia are aware of the negative effects of global warming and are willing to curb the negative effects by buying more solar electricity to encourage the green electricity producers and at the same time discouraging the electricity producers who use fossil fuel to generate electricity. Here consumers are preferring to maximize the social benefits over their personal benefits. So, their decision is a rational decision as it maximizes their benefits coinciding with the benefits to the society. It won`t be wrong to state that the benefit consumers would get can be realized over the longer period of time than maximizing their benefits from a single transaction.
Quality of services – it is possible the quality of the electricity service of the current supplier is far better than the other service provider making it worth to stick to the current supplier. The new supplier may have bad reputation of higher number of hours-of-service interruption in a month leading to a greater inconvenience for people, which may financially not be viable to consumers. As a result, staying with the current supplier could be considered as a rational decision.
Though I tried to evaluate the case with precision, but it won’t be absolutely perfect as the benefits to each consumer to choose the other supplier over the current could be different. As it is not possible to measure the true benefits of each consumer, so it is hard to say whether the decision is rational or irrational.
Besides, market conditions change over time so as the services. As a result, consumer may switch to the other supplier over time rejecting the claims made in the case study. This is possible if the benefits are offers are really lucrative and exceeds their expectations to receive benefits.
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