Competition in the Irish Private Health Insurance Market

• Psychological costs
6.5 Transaction costs are the time and money costs incurred by consumers
in switching. When consumers speak of “hassle”, they are generally
referring specifically to transaction costs. Transaction costs for
consumers in the PHI market are relatively low, as switching can be
accomplished easily in a matter of minutes, by means of two phone
calls or online. This compares favourably with, for example, switching
mortgage provider, home insurance or internet service provider, all of
which involve higher transaction costs. However, even where switching
is relatively straightforward, so long as consumers perceive switching
to be difficult, less switching will take place.
6.6 Psychological costs of switching 80 occur where consumers who were
initially indifferent between competing producers develop a preference
for a particular brand simply because they have become used to it, and
consequently perceive a cost of switching to other brands. 81 This
characteristic could also be described as inertia. The HIA/Insight
Market Review indicates that consumers of PHI have a propensity to
succumb to the psychological costs of switching –respondents claimed
that they would not switch because they could not be bothered (9%),
felt loyal to their current provider (8%), or had been with their current
provider a long time (13%).
6.7 In a market characterised by switching costs, consumers are likely to
display brand loyalty, 82 thereby contributing to consumer inertia. It is
rational for a consumer to remain with a supplier they are satisfied
with. Rational consumers will not consider switching until they can
confidently expect that the benefits of switching will exceed the varied
costs of switching. The best way to ensure this is to lower search and
transactional switching costs, such that consumers will be more willing
to switch for even a small incremental benefit.
6.8 Switching costs also have two distinct impacts on suppliers.
• First, switching costs make consumers less likely to react to price
increases than they otherwise would be, as a higher price increase
will be required for them to determine that it is worthwhile
incurring the switching costs.
• Second, because consumers in markets with high switching costs
are considered to be “locked in” once they have chosen a particular
supplier, intense competition generally only occurs for consumers
who are new to the market, such as students, graduates and
individuals starting their first job.
6.9 Consumer switching costs also tend to give firms a degree of market
power over “locked in” repeat-purchasers of their products. The
Competition Authority found evidence of precisely this phenomenon in
its Study of competition in the (non-investment) banking sector,
whereby secondary school and university students were actively
targeted with attractive introductory personal current account offers, in
80 Also known as non-economic brand loyalty
81 Klemperer (1995), p.518
82 Klemperer (1987), p.376
88