Swap Shop – Undercover Economist

17th March, 2007

Britain’s bank customers are in the throes of a most un-British uprising. They have discovered that writing to their bank to demand the repayment of excessive overdraft charges is both fun and profitable. There is nothing wrong with this behaviour, but it is selfish. I’m writing this column in an effort to make us more public-spirited in our attempts to claw money away from our favourite faceless corporations.

A scenario in which thousands – perhaps millions – of customers can successfully claim back money is unusual, the result of a regulator’s decree. But the basic situation is very common indeed. Customers have bought into a product line or ongoing service, in this case a bank account, and have decided they’re no longer happy with the way the service is provided. They decide, however, that switching to a competitor is too much trouble.

Lots of products display what economists call ”switching costs”: your mobile phone network; the supermarket whose layout you’ve mastered; a brand of car you know how to drive; your trusty PC – or should that be your trusty Mac? Sometimes the ”switching cost” is financial, but often it’s simply a matter of inconvenience.

The rational response of any business whose customers won’t switch is to exploit them. If you have a small market share you need to attract future victims by offering fantastic prices. Once you have a large market share you should milk it. Best of all is to combine the large market share and the growth by sucking customers in with a tempting initial offer.

This all sounds familiar to me….

Continued at ft.com, subscription free.

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