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Originally published August 16 2014

Consumer groups can reduce prices and improve free market without government bureaucracy

by Jonathan Benson, staff writer

(NaturalNews) When the free market fails or becomes corrupted, many people's first instinct is to call on the government to intervene and make things right. But a new study out of the UK has found that ordinary people can bring about real change when they simply band together with one another and use the power of numbers to negotiate in their collective favor.

This is particularly true when it comes to energy costs, which can be effectively reined in through group buying schemes rather than regulatory bureaucracy. Dr. Valentin Robu from Heriot-Watt University and a team of researchers, speaking at the recent AAAI Artificial Intelligence Conference in Canada, found that consumers can benefit more from drawing upon each other rather than upon the government.

Electricity tariffs in the UK have been steadily rising in recent years, making it increasingly more difficult for many families to make ends meet. So, many of them have begun forming coalitions to negotiate better prices, using multiple models of group buying to attain the best prices. And according to the study, this strategy has driven costs down more than if the government had set its own price ceilings.

In the UK, as well as in certain parts of the U.S., providers sell the energy they produce on the wholesale market to other companies that deliver it to consumers using a resale format. These companies set their prices based on expected usage, which is typically averaged across the entire spectrum of customers.

This structure can lead to higher overall prices, as some customers will use less energy while others use more, increasing the risk that resale energy companies will have to foot the bill for buying too much energy from the wholesale market. But by joining forces with others who use energy similarly, consumers can negotiate a lower overall rate, given that they all agree to specified terms.

"Electricity suppliers buy from the wholesale market where electricity prices are considerably lower," stated Dr. Robu. "There are a number of ways they sell this onto consumers but typically they predict the amount of electricity required and pass on premium prices to consumers to cover any risk associated with over or under buying, allowing them to make profits."

More choices means better savings, and consumers can work together to find out what works best for their needs

What this looks like in practice is that consumer groups negotiate using either an unpredictable tariff model, in which energy is purchased based on actual units consumed, or a predictable tariff model, in which energy is purchased in bulk based on expected usage. The latter ends up being less expensive if consumers meet the predicted usage outcomes but can become more expensive if they use more or less than the predicted amount purchased.

Field tests have already shown that both models can save consumers significant amounts of money. Individuals and families are free to decide which one works best for their energy needs, and most are able to find a setup that works better than the standard energy distribution model. The trick is convincing people that working together will help them save money.

"Crucially, this is where group buying is important," added Dr. Robu. "While everyone has potentially some uncertainty about their future consumption, our work shows that, by grouping together, consumers can gain size and market power and reduce their risk and access better prices."

"Our next challenge is to design smarter systems that not only propose the efficient tariff groups, but also 'nudge' people towards making the optimal choice for them."

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