Competition in the Irish Private Health Insurance Market

6. BARRIERS TO RIVALRY
Summary
6.1 Markets do not work well where consumers find it difficult to easily
alter their preferences between competing firms. There are three firms
active in the Irish PHI market, and it is vital that they are able to
compete vigorously with each other if consumers are to benefit from
competition. Although the actual process of switching insurers is simple
and straightforward, there are low levels of switching in the PHI
market and a range of barriers to switching and barriers to rivalry
exist. Search costs and switching costs inhibit switching, while the
psychological costs of switching promote inertia and cause people to
remain with their incumbent insurer even where competitors offer
better value products 77 . Certain established market practices also
make it less likely that consumers will switch in response to better
product offerings from other PHI firms. To promote competitive PHI
markets, consumers need to be aware that it is easy to switch. They
also need the necessary information on competing products to decide
whether to switch insurers, and they need to have confidence that the
switching process will occur smoothly and efficiently. Accordingly, the
Authorities make a range of recommendations designed to promote
rivalry between PHI firms and promote awareness of switching
amongst consumers.
Switching Costs
6.2 Switching costs are the monetary and non-monetary costs incurred by
consumers when they move from one supplier to another. 78 Switching
costs make competition less likely because they make it more difficult
for consumers to switch from one supplier to another in response to a
cheaper price, new products, or better customer care.
6.3 Price competition, non-price competition and innovation are all less
common in markets characterised by high switching costs because
suppliers need to put less effort into retaining their customers because
those customers will find it difficult to change their supplier. In general,
prices tend to be higher where switching costs, real or perceived, are
present than when they are absent. 79
6.4 The most important switching costs in the Irish PHI market are:
• Transaction costs
77 The psychological costs of switching financial services providers appear to be relatively high in
Ireland. Switching rates are also relatively low in some other financial services markets, notably retail
banking. See “Competition in the (non-investment) Banking sector in Ireland”, The Competition
Authority (2005)
78 A considerable economic literature has amassed on the concepts of switching and search costs.
79 See, for example, Klemperer, P. (1987) Markets with Consumer Switching Costs. Quart. J. Econ.,
pp.375-294; Klemperer, P. (1988) Welfare Effects of Entry Into Markets with Switching Costs. J. Ind.
Econ., pp.159-165; Klemperer, P. (1995) Competition when Consumers have Switching Costs: An
Overview with Applications to Industrial Organisation, Macroeconomics and Industrial Trade. Rev.
Econ. Studies, pp.515-539
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