Knowledge - 2 marks
Application - 2 marks
Analysis - 2 marks
Eval - 4 marks
Structure
Para 1: Knowledge - Define an economic concept from the question
Para 2: Analysis - Answer the question + application
Para 3: Evaluation - Provide the opposing view + knowledge
Para 4: Analysis - Answer the question + application
Para 5: Evaluation - Provide the opposing view
Consumers are assumed to behave rationally and aim to maximise their utility. However, according to behavioural economists this many not always be the case.
One reason why consumers may not switch to a cheaper telephone provider is due to brand loyalty. This means they feel an attachment to a certain brand as they prefer to stick with what they know or are most comfortable with. As a result, consumers may remain with a with their current supplier even if they are being charged a higher price than substitute firms. This can be seen in the extract that “many landline only customers have been with BT for decades”. Additionally, consumers may suffer from habitual behaviour and thus may not switch to an alternative supplier. Habitual behaviour is where they get into a routine of purchasing the same good, even if this decision is not totally rational.
However, different firms may not actually have significantly different prices for consumers. The extract states that BT has a position of dominance, suggesting it possess some characteristics of a monopoly, such as high price setting power and low levels of competition. As BT is a dominant player in the market, consumers may not have many alternative firms to switch to, even if they wanted to.
Another reason why consumers may not switch to a cheaper telephone provide is due to computational problems. As mentioned in the extract “nearly two-thirds of their customers are over 65”. At this older age, people may find it confusing to research alternative providers. They may also lack the ability to work out which providers will save them the most money. Therefore, they may remain with providers that are overcharging them by “£84 a year”.
However, to evaluate, the fact that consumers are not switching, may be due to information asymmetries – a type of market failure. Providers hold a significantly greater amount of information than consumers, and therefore can exploit consumers through higher prices. As such, consumers are not switching providers due to a lack of information to make a rational decision.
