- Comparison power for consumers could boost UK economy by £14 billion and drive long-term productivity growth
LONDON, 18th March, 2024 – A lack of available information that could help consumers and businesses compare quality and price when buying goods or services is costing the UK economy around £14 billion in revenue, new research from the Behavioural Insights Team (BIT) finds.
The paper – titled ‘The Shrouded Economy’ – highlights that UK buyers are often unable to identify the best products and services, because they can’t access standardised information that would make comparisons between competitors easier, such as around price or past performance. This effect, called “shrouding”, leads to consumers overpaying and making worse quality purchases.
Case studies in the research include grocery prices that vary from weight (per 100g) to per packet pricing – and price comparison sites labelling poorer value broadband deals as being from the “provider of the year”.
The paper points to even more challenges for time poor consumers who seek reassurance about quality. For example, how can consumers confidently judge a green or healthy product, a high quality heat pump provider or installer, or judge the quality of their local nursery or care home?
The success of past examples of “deshrouding” – providing the consumer with available data and info at the point of purchase – are highlighted in the analysis. Previous research showed that an extra star out of 5 on a restaurant rating boosts sales by 7% in the following year, showing that consumers respond to better information. Similarly, a one-star increase in a hotel’s online reviews increases demand by 25% and enables them to raise prices by 9%. These changes disproportionately benefit vulnerable and inexperienced consumers, and businesses that are smaller, new and more innovative.
The BIT analysis estimates the impact on the UK economy if the demand shifts observed in restaurant and hotel industries – where consumers shifted to better suppliers – were replicated across shrouded UK markets, ranging from retail markets to consumer and business services such as private healthcare, legal services, and consultancy.
With the UK’s productivity growth close to flatlining since 2008, the researchers estimate that taking a proactive approach to deshrouding all consumer markets could add an immediate 0.6 percent boost to UK GDP, adding value of between £5bn to £23bn. This is equivalent to the expected GDP growth from full expensing – the government’s flagship productivity policy. It also increases the long-term growth rate.
To achieve this, the paper recommends a series of actions to tackle shrouding to improve fairness and transparency for consumers. These include:
- a sector-by-sector Government audit of consumer facing markets; and
- releasing more centrally-held data to help with the development of comparison tools, in markets such as accountancy and private rental.
Professor David Halpern, President and Founding Director of the Behavioural Insights Team, said:
“The UK needs to get out of the productivity slump it’s been stuck in for more than a decade. This new analysis shows that boosting the consumers’ ability to tell good from bad products and services lifts economic growth substantially, and puts money back in hard-pressed consumer pockets. It’s a win-win.
“To get there, we need regulators and entrepreneurs to push the next generation of smarter comparison sites and sharper competition. It will shift spending, investment and labour to better businesses, while squeezing less productive – and ‘rip-off’ – firms to get on or get out.”
Ian Mulheirn, Associate and Head of Wealth Research at the Resolution Foundation, said:
“The information age should have put unprecedented power in the hands of consumers to identify value and drive productivity growth. But more often than not it simply confuses consumers with a blizzard of information and misinformation that makes that task harder. This report shows how important it is for policy makers to get on the front foot and tackle shrouding systematically to empower consumers and drive economic growth in the process.”
Ends
Notes to editors
- Researchers estimated the impact of deshrouding on productivity by assuming that productivity moves in line with satisfaction ratings. Using the productivity distribution of all firms in the UK, broken down by firm size, the revenue of firms was then adjusted based on the observed effects of star ratings on revenue in the restaurant industry, using figures from the 2016 paper from Harvard Business School’s Michael Luca. The size of the economy was calculated by estimating the total productivity of firms per worker before and after the changes, multiplied by the number of workers employed by firms of that size. To identify industries that are likely to benefit from deshrouding and estimate what proportion of the economy they make up, researchers used data from the Annual Business Survey, making a judgement on each industry code as to whether they are likely to benefit from deshrouding, and then estimating the percentage of the economy covered by these industries using their Gross Value Added (GVA).
- For more information on the analysis or to speak to one of the experts involved, please contact Kieran Lowe, Media Manager, on 020 7438 2576 or kieran.lowe@nesta.org.uk. Spokespeople are available for broadcast interviews.
About the Behavioural Insights Team
The Behavioural Insights Team (BIT) is one of the world’s leading behavioural science consultancies, working around the world to improve people’s lives.
BIT works in partnership with governments, local authorities, businesses and NGOs in over 30 countries, often using simple changes to tackle major policy problems and deliver improved public services and social outcomes.
BIT was established by the UK government in 2010. In 2014 it became an independent social purpose company, part owned by the Cabinet Office and innovation agency Nesta, and since 2021 has been entirely owned by Nesta.
For more information on our work and our team visit www.bi.team and follow us on LinkedIn, X, Instagram, YouTube and Medium.
