Tag: behavioural economics

During the pandemic, most people who were not furloughed were forced to work from home. After lockdown restrictions were lifted, many employers decided to continue with people working remotely, at least for some of the time.

Today, this hybrid model, whereby workers work partly from home or local workspaces and partly in the office/factory/warehouse etc., has become the ‘new normal’ for around 26% of the working population in Great Britain – up from around 10% at the end of the national lockdowns in the Spring of 2021.

Increasingly, however, employers who had introduced hybrid working are requiring their employees to return to the office, arguing that productivity and hence profits will rise as a result. Amazon is an example. Other employers, such as Asda, are increasing the time required in the office for hybrid workers.

Hybrid working had peaked at around 31% in November 2923 as the chart shows (click here for a PowerPoint). The chart is based on the December 20 database, Public opinions and social trends, Great Britain: working arrangements from the Office for National Statistics (see link under Data, below).

But why are some employers deciding that hybrid working is less profitable than working full time in the office. And does it apply to all employers and all employees or only certain types of firm and certain types of job?

The first thing to note is that hybrid work is more common among certain groups. These include older workers, parents, graduates and those with greater flexibility in scheduling their work, especially those in managerial or professional roles with greater flexibility. Certain types of work on the other hand do not lend themselves to hybrid work (or working completely from home, for that matter). Shop workers and those providing a direct service to customers, such as those working in the hospitality sector, cannot work remotely.

Benefits of hybrid working

For some employees and employers, hybrid working has brought significant benefits.

For employees, less time and money is spent on commuting, which accounts for nearly an hour’s worth of the average worker’s daily time. According to the ONS survey, respondents spent an additional 24 minutes per day on sleep and rest and 15 minutes on exercise, sports and other activities that improved well-being compared to those who worked on-site. Working at home can make juggling work and home life easier, especially when workers can work flexible hours during the day, allowing them to fit work around family commitments.

Employers benefit from a healthier and more motivated staff who are more productive and less likely to quit. Hybrid work, being attractive to many workers, could allow employers to attract and retain talented workers. Also, employees may work longer hours if they are keen to complete a task and are not ‘clocking off’ at a particular time. Working from home allows workers to concentrate (unless distracted by other family members!).

By contrast, office working can be very inefficient, especially in open offices, where chatty colleagues can be distracting and it is difficult to concentrate. What is more, employees who are slightly unwell may continue working at home but may feel unable to commute to the office. If they did, they could spread their illness to other colleagues. Not allowing people to work from home can create a problem of ‘presenteeism’, where people feeling under the weather turn up to work but are unproductive.

One of the biggest benefits to employers of hybrid work is that costs can be saved by having smaller offices and by spending less on heating, lighting and facilities.

With hybrid working, time spent on site can be devoted to collaborative tasks, such as meetings with colleagues and customers/suppliers and joint projects where face-to-face discussion is required, or at least desirable. Tasks can also be completed that required specialist equipment or software not available at home.

Problems of hybrid working

So, if hybrid working has benefits for both employers and employees, why are some employers moving back to a system where employees work entirely on site?

Some employers have found it hard to monitor and engage employees working from home. Workers may be easily distracted at home by other family members, especially if they don’t have a separate study/home office. People may feel detached from their co-workers on days they work from home. After a time, productivity may wane as workers find ways of minimising the amount of time actually working during declared work times.

Far from improving work-life balance, for some workers the boundaries between work and personal life can become blurred, which can erode the value of personal and family time. This can create a feeling of never escaping from work and be demotivating and reduce productivity. Employees may stay logged on longer and work evenings and weekends in order to complete tasks.

Unless carefully planned, on days when people do go into the office they might not work effectively. They may be less likely to have profitable ad hoc conversations with co-workers, and meetings may be harder to arrange. Misunderstandings and miscommunication can occur when some employees are in the office but others are at home.

Some employers have found that the problems of hybrid working in their organisations have outweighed the benefits and that productivity has fallen. In justifying its ending of hybrid working from 1 January 2025, Amazon CEO, Andy Jessy, wrote in a memo to staff in September 2024:

To address the … issue of being better set up to invent, collaborate, and be connected enough to each other and our culture to deliver the absolute best for customers and the business, we’ve decided that we’re going to return to being in the office the way we were before the onset of COVID. When we look back over the last five years, we continue to believe that the advantages of being together in the office are significant.1

But is the solution to do as Amazon is doing and to abandon hybrid working and have a mass ‘return to the office’?

Improving hybrid working

There are ways of making hybrid working more effective so that the benefits can be maximised and the costs minimised.

Given that there are specific benefits from home working and other specific benefits from working on-site, it would be efficient to allocate time between home and office to maximise these benefits. The optimum balance is likely to vary from employer to employer, job to job and individual to individual.

Where work needs to be done in teams and where team meetings are an important element of that work, it would generally make sense for such meetings to be held in person, especially when there needs to be a lot of discussion. If the team requires a brief catch up, however, this may be more efficiently done online via Teams or Zoom.

Individual tasks, on the other hand, which don’t require consultation with colleagues or the use of specific workplace facilities, are often carried out more efficiently when there is minimum chance of interruption. For many workers, this would be at home rather than in an office – especially an open-plan office. For others without a protected work space at home or nearby, it might be better to come into the office.

The conclusion is that managers need to think carefully about the optimum distribution between home and office working and accept that a one-size-fits-all model may not be optimum for all types of job and all workers. Recognising the relative benefits and costs of working in different venues and over different hours may help to achieve the best balance, both for employers and for workers. A crucial element here is the appropriate use of incentives. Workers need to be motivated. Sometimes this may require careful monitoring, but often a more hands-off approach by management, with the focus more on output and listening to the concerns of workers, rather than on time spent, may result in greater productivity.

1Message from CEO Andy Jassy: Strengthening our culture and teams, Amazon News (16/9/24)

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Questions

  1. Why may hybrid working be better for (a) employees and (b) employers than purely home working or purely working in the office?
  2. Why are many firms deciding that workers who were formerly employed on a hybrid basis should now work entirely from the office?
  3. What types of job are better performed on site, or with only a small amount of time working from home?
  4. What types of job are better performed by working at home with just occasional days in the office?
  5. Does the profile of workers (by age, qualifications, seniority, experience, family commitments, etc) affect the likelihood that they will work from home at least some of the time?
  6. How would you set about measuring the marginal productivity of a worker working from home? Is it harder than measuring the marginal productivity of the same worker doing the same job but working in the office?
  7. How may working in the office increase network effects?
  8. How may behavioural economics help managers to understand the optimum balance of home and on-site working?

Artificial Intelligence (AI) is transforming the way we live and work, with many of us knowingly or unknowingly using some form of AI daily. Businesses are also adopting AI in increasingly innovative ways. One example of this is the use of pricing algorithms, which use large datasets on market conditions to set prices.

While these tools can drive innovation and efficiency, they can also raise significant competition concerns. Subsequently, competition authorities around the world are dedicating efforts to understanding how businesses are using AI and, importantly, the potential risks its use may pose to competition.

How AI pricing tools can enhance competition

The use of AI pricing tools offers some clear potential efficiencies for firms, with the potential to reduce costs that can potentially translate into lower prices for consumers.

Take, for instance, industries with highly fluctuating demand, such as airlines or hotels. Algorithms can enable businesses to monitor demand and supply in real time and respond more quickly, which could help firms to respond more effectively to changing consumer preferences. Similarly, in industries which have extensive product ranges, like supermarkets, algorithms can significantly reduce costs and save resources that are usually required to manage pricing strategies across a large range of products.

Furthermore, as pricing algorithms can monitor competitors’ prices, firms can more quickly respond to their rivals. This could promote competition by helping prices to reach the competitive level more quickly, to the benefit of consumers.

How AI pricing tools can undermine competition

However, some of the very features that make algorithms effective can also facilitate anti-competitive behaviour that can harm consumers. In economic terms, collusion occurs when firms co-ordinate their actions to reduce competition, often leading to higher prices. This can happen both explicitly or implicitly. Explicit collusion, commonly referred to as illegal cartels, involves firms agreeing to co-ordinate their prices instead of competing. On the other hand, tacit collusion occurs when firms’ pricing strategies are aligned without a formal agreement.

The ability for these algorithms to monitor competitors’ prices and react to changes quickly could work to facilitate collusion, by learning to avoid price wars to maximise long-term profits. This could result in harm to consumers through sustained higher prices.

Furthermore, there may be additional risks if competitors use the same algorithmic software to set prices. This can facilitate the sharing of confidential information (such as pricing strategies) and, as the algorithms may be able to predict the response of their competitors, can facilitate co-ordination to achieve higher prices to the detriment of consumers.

This situation may resemble what is known as a ‘hub and spoke’ cartel, in which competing firms (the ‘spokes’) use the assistance of another firm at a different level of the supply chain (e.g. a buyer or supplier that acts as a ‘hub’) to help them co-ordinate their actions. In this case, a shared artificial pricing tool can act as the ‘hub’ to enable co-ordination amongst the firms, even without any direct communication between the firms.

In 2015 the CMA investigated a cartel involving two companies, Trod Limited and GB Eye Limited, which were selling posters and frames through Amazon (see linked CMA Press release below). These firms used pricing algorithms, similar to those described above, to monitor and adjust their prices, ensuring that neither undercut the other. In this case, there was also an explicit agreement between the two firms to carry out this strategy.

What does this mean for competition policy?

Detecting collusion has always been a significant challenge for the competition authorities, especially when no formal agreement exists between firms. The adoption of algorithmic pricing adds another layer of complexity to detection of cartels and could raise questions about accountability when algorithms inadvertently facilitate collusion.

In the posters and frames case, the CMA was able to act because one of the firms involved reported the cartel itself. Authorities like the CMA depend heavily on the firms involved to ‘whistle blow’ and report cartel involvement. They incentivise firms to do this through leniency policies that can offer firms reduced penalties or even complete immunity if they provide evidence and co-operate with the investigation. For example, GB eye reported the cartel to the CMA and therefore, under the CMA’s leniency policy, was not fined.

But it’s not all doom and gloom for competition authorities. Developments in Artificial Intelligence could also open doors to improved detection tools, which may have come a long way since the discussion in a blog on this topic several years ago. Competition Authorities around the world are working diligently to expand their understanding of AI and develop effective regulations for these rapidly evolving markets.

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Questions

  1. In what types of markets might it be more likely that artificial intelligence can facilitate collusion?
  2. How could AI pricing tools impact the factors that make collusion more or less sustainable in a market?
  3. What can competition authorities do to prevent AI-assisted collusion taking place?

Policy makers have become increasingly concerned about what the US Federal Trade Commission (FTC) describe as ‘negative option marketing’. These are marketing deals that contain the following feature:

a term or condition that allows a seller to interpret a customer’s silence, or failure to take affirmative action, as an acceptance of an offer.

For example, companies such as Amazon, Apple, Spotify and Netflix may offer students a 3-month free trial or 3-month introductory offer (at a special lower price) for movie and music streaming services. However, many of these subscription contracts contain an example of negative option marketing – auto renewal clauses.

Problems with auto-renewal contracts

The inclusion of an auto-renewal clause means that if a customer fails to cancel the subscription at the end of the three-month period, the subscription automatically reverts to its full price. The full-price contract then continues to roll-over indefinitely unless the customer takes a pre-specified action to terminate the deal. Inattentive consumers could end up paying subscription prices that far exceed their willingness to pay.

Auto-renewal contracts are not just an issue with free trials/introductory offers. Some people may purchase subscription contracts at the full price and then forget about them. These consumers could end up paying fees for months after they have effectively stopped using the service.

Another potential problem with the use of auto-renewal contracts, is businesses deliberately making the cancellation process more complex than it needs to be. In many cases it takes just one click to sign up for the subscription, but multiple clicks through a series of menus to cancel. Some businesses do not provide consumers with the option to cancel online and, instead, they are forced to phone a number that is often very busy.

Effects on consumer welfare

To what extent do these problems caused by auto-renewal reduce consumer welfare? What evidence do we have?

Research by Citizens Advice found that just over one in four people (26 per cent) had signed up to a subscription by accident. 58 per cent of this group forgot to cancel a free trial, while 21 per cent did not realise that the free trial would automatically roll-over to a full-price subscription. This seems to be a particular issue for those on low incomes with 46 per cent of people on Universal Credit signing up to a subscription by accident.

Analysis by the Department for Business and Trade (DBT) has tried to estimate the value of these unwanted subscriptions. The study found that consumers spent £602 million on unwanted subscriptions where a free or reduced-price trial had been rolled over to the full price. The same study also found that £573 million was spent on subscriptions that people had forgotten about.

One in five people in the Citizens Advice study who tried to cancel a subscription found the process difficult. The DBT estimates that cancellation difficulties led to £382 million being spent on unwanted subscriptions.

UK Government response

In response to these findings, the government introduced the Digital Markets, Competition and Consumers Bill into Parliament in April 2023.

Provisions in the Bill seek to standardise the information that businesses must provide consumers before they sign up for subscription contracts. For example, in the future, firms will have to display prominently (a) any auto-renewal provisions, (b) whether the price increases after a specified period, (c) details about how consumers can terminate the contract and (d) cooling-off periods.

The Bill also stipulates that businesses will have to provide consumers with reminders when a free/reduced-price trial period is about to end and/or a subscription is about to renew automatically. They must also make it easy to exit contracts and remove any unnecessary steps.

The government initially considered an additional measure that would force businesses to provide consumers with the option to take out any subscription without auto-renewal.

Citizens Advice strongly supported this policy. They argued that not only should consumers be given the choice, but that auto-renewal should not be the default i.e. people would have to opt-in to auto-renewal subscriptions.

However, after the consultation process for the Bill, the government decided against introducing this additional measure. Businesses have also argued that the other elements of the policy are too prescriptive.

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Government documents

Questions

  1. Outline some theories from behavioural economics that might help to explain why people sometimes end up with unwanted subscriptions.
  2. Discuss some of the potential benefits of auto-renewal subscriptions for both consumers and firms.
  3. Using behavioural economic theory, explain some of the potential disadvantages for businesses of using auto-renewal subscriptions.
  4. When businesses deliberately make the cancellation process more complex than it needs to be, it is referred to as an example of ‘sludge’. Explain the meaning of ‘sludge’ in more detail, referring to some different examples in your answer.
  5. What difference do you think it would make to the number of people signing up for auto-renewal subscriptions if you had to opt-in as opposed to opting out? Explain your answer.
  6. Another policy would be to force firms to cancel subscription contracts if there is evidence that consumers have not used the service for a long period of time. Discuss some of the advantages and disadvantages of this measure.
  7. Explain what are meant by ‘dark patterns’. How may the choice architecture on some sites actually hinder consumer choice?

When building supply and demand models, the assumption is usually made that both producers and consumers act in a ‘rational’ way to achieve the best possible outcomes. As far as producers are concerned, this would mean attempting to maximise profit. As far as consumers are concerned, it would mean attempting to achieve the highest satisfaction (utility) from their limited budget. This involves a cost–benefit calculation, where people weigh up the costs and benefits of allocating their money between different goods and services.

For consumers to act rationally, the following assumptions are made:

  • Consumer choices are made independently. Their individual choices and preferences are not influenced by other people’s, nor do their choices and preferences impact on other people’s choices.
  • The consumer’s preferences are consistent and fixed.
  • Consumers have full information about the products available and alternatives to them.
  • Given the information they have and the preferences they hold, consumers will then make an optimal choice.

Black Friday can be seen as a perfect occasion for consumers to get their hands on a bargain. It is an opportunity to fulfil a rational need, for example if you were needing to replace a household appliance but were waiting until there was a good deal before committing to a purchase.

The assumption that people act rationally has been at the forefront of economic theory for decades. However, this has been questioned by the rise in behavioural economics. Rather than assuming that all individuals are ‘rational maximisers’ and conduct a cost–benefit analysis for every decision, behavioural economists mix psychology with economics by focusing on the human. As humans, we do not always behave rationally but, instead, we act under bounded rationality.

As economic agents, we make different decisions depending on our emotional state that differ from the ‘rational choice’ assumption. We are also influenced by our social networks and often make choices that provide us with immediate gratification. Given this, Black Friday can also be viewed as a great opportunity to fall prey to irrational and emotional shopping behaviours.

Black Friday originated in the USA and is the day after Thanksgiving. During this annual shopping holiday, retailers typically offer steep discounts to kick off the holiday season. The Black Friday shopping phenomenon is less than a decade old in the UK but it’s now an established part of the pre-Christmas retail calendar. Between 2010 and 2013, Black Friday gradually built up momentum in the UK. In 2014, Black Friday became the peak pre-Christmas online sales day and many online retailers haven’t looked back.

Arguably, from a behavioural economist’s perspective, the big problem with Black Friday is that all the reasons consumers possibly have to partake can be largely illusory. Consumers are bombarded with the promise of one-off deals, large discounts, scarce products, and an opportunity to get their holiday shopping done all at once. However, on Black Friday, our rational decision-making faculties are tested, just as stores are trying their hardest to maximise consumers’ mistakes.

There are many ‘behavioural traps’ that consumers often fall into. The following two are most likely to occur on Black Friday:

  • Scarcity and loss aversion. Shoppers may fear that they will miss out on the best sales deals available if they don’t buy it now. Retailers commonly spark consumers’ interest by highlighting limited stocks available for a limited time only, which raises the perceived value of these goods. This sense of scarcity can further trigger the need to buy now, increasing the ‘Fear of Missing Out’. Consumers therefore need to ask themselves if they are really missing out if they don’t buy it now? And is the discount worth spending the money today, or is there something else I should be spending it on or saving for?
  • Sunk cost fallacy. Once consumers have started to invest, they often struggle to close out investments that prove unprofitable. On Black Friday, customers have already made the initial investment of getting up early, driving to the shops, finding parking and waiting in a queue, before they have purchased anything. Therefore, they will be inclined to buy more than they initially went for. It is important therefore to think about each purchase in isolation.

This year, however, there is also the added complication of the rising cost of living. Whilst this may deter some consumers from unnecessary, impulse purchases, some consumers are using Black Friday as an opportunity to stock up on expected future purchases, hedging against likely price rises over the coming months.

It is thought that more consumers will be looking for a combination of high quality but low price to make sure their purchases are affordable and can last for a long time. According to PwC, many consumers have closely monitored their favourite brands in anticipation that big-ticket electronics, more pricey winter wear or Christmas stocking fillers will be discounted. Consumers are also in search of bargains more than ever given rising inflation. This would suggest a shift in attitude, meaning consumers will be more aware of what they cannot afford rather than giving in to emotional temptation brought on by Black Friday.

Retailers are fully aware of the cognitive biases that surround Black Friday and take full advantage of them. ‘Cyber Monday’ follows right after Black Friday, giving retailers an extra opportunity for them to keep those ‘urgent’ or ‘unmissable’ sales going and increase their revenues.

Black Friday is one of the biggest shopping days of the year. However, the way retailers approach it is growing increasingly mixed. Stores such as Amazon, Argos, Currys and John Lewis have started offering Black Friday deals much earlier in the month, leading some to refer to the event as ‘Black November’. Other stores, such as M&S and Next, didn’t take part at all this year.

Ultimately, Consumers can use insights from behavioural economics to empower them to make more rational decisions in such circumstances: ones that better align with their individual budgets. Nevertheless, the Black Friday sales mania can trigger our deepest emotional and cognitive responses that lead to unnecessary spending.

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Questions

  1. Discuss what is meant by the term ‘rational consumer’. Is it a useful generalisation about the way consumers behave?
  2. Discuss what is meant by the term ‘rational producer’. Is it a useful generalisation about the way firms behave?
  3. What is cost–benefit analysis? What is the procedure used in conducting a cost–benefit analysis?
  4. In addition to scarcity and loss aversion and the sunk cost fallacy, are there any other reasons why consumers may not always act rationally?
  5. Are people likely to be more ‘rational’ about online Black Friday purchases than in-store ones? Explain.

On 15 March 2019, the ‘Organ Donation (Deemed Consent) Bill’ was passed into law. (See the blog, Organ donations – Changing the default option vs active choice.) The government has just announced that this will come into force on 20 May this year. Under the scheme, ‘adults in England will be considered potential donors unless they chose to opt out or are excluded. The act is known as Max and Keira’s law in honour of a boy who received a heart transplant and the girl who donated it.’

This change from an ‘opt-in’ to an ‘opt-out’ system follows a similar a move in Wales in 2015. Since then, Wales has seen a significant increase in potential donors, with the consent rate rising from 58% to 77%. A similar move in Scotland will come into force in the autumn of this year. The government expects there to be an additional 700 transplant operations per year available for transplant by 2023.

These moves from an opt-in to an opt-out system are consistent with ‘nudge theory’. This maintains that positive reinforcement or making a decision easy for people can persuade them to make a particular choice. They are ‘nudged’ into so doing.

Opting out and nudge theory

In the case of having to opt in to a scheme such as organ donation, people have to make the decision to take part. Many, as a result, do not, partly because they never seem to find the time to do so, even though they might quite like to. With the busy lives people lead, it’s too easy to think, ‘Yes, I’ll do that some time’, but never actually get round to doing it: i.e. they have present bias and hence behave in a time-inconsistent manner.

With an opt-out system, people are automatically signed up to the scheme, but can freely choose to opt out. In the case of the new organ donor schemes in the UK, it is/will be assumed that organs from people killed in an accident who had not opted out could be used for transplants. If you do not want your organs to be used, you have to notify that you are opting out.

It could be the same with charitable giving. Some firms add a small charitable contribution to the price of their products (e.g. airline tickets or utility bills), unless people opt out.

Similarly, under UK pension arrangements introduced from 2012, firms automatically deduct pension contributions from employees’ wages unless they opt out of the scheme. Opt-out pension schemes like this retain between 90 and 95 per cent of employees. Opt-in pension schemes, by contrast, have much lower participation rates of around 60 per cent, even though they are otherwise identical.

This type of ‘nudging’ can improve the welfare of those who make systematic mistakes (i.e. operate in a time-inconsistent manner), while imposing very limited harm on those who act in a time-consistent manner. If it is in the interests of someone to opt out of the scheme, they can easily do so. Policies such as these are an example of what behavioural economists call ‘soft paternalism’.

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Official Information

Questions

  1. Why do opt-out schemes have a higher take up than opt-in ones? Would this apply if people behaved in a time-consistent manner?
  2. What is present bias? How does it differ from simple impatience? Explain how present bias might help to explain the impact of changing the default option.
  3. What are the arguments for and against nudging people to make decisions that benefit them or are in the social interest?
  4. Give some example of nudges that are used in public policy or would be a good idea to use. Consider how effective they are likely to be. (You might refer to the work of the Behavioural Insights Team.)
  5. What are the possible drawbacks of presumed consent in organ donation?
  6. What are the arguments for and against paying live people to donate organs, such as a kidney?
  7. How might people be encouraged to behave in the right way during an epidemic, such as corona virus?
  8. To what extent was nudge theory used during the Brexit referendum campaign and in the two subsequent general elections?