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elaborated below, as funeral directors are forced to recover costs directly through pricing. This could include scenarios whereby vulnerable families are faced with increasing costs if they delay making decisions about the funeral. Implications of the COVID-19 Pandemic for the Funeral Director Market and the CMA Investigation - 6 - A shift away from the marginal cost pricing principle is applicable in other industries. These include pharmaceuticals, where the costs of drugs that make it to market are designed to recoup research and development costs more broadly, and IT innovation in the pricing of individual software packages. There are also many examples of where Ramsey pricing can be welfare maximising. These considerations should contribute to the CMA’s analysis of the market and any remedies. Unintended consequences of price caps In light of the above, the risk of unintended consequences of price regulation is high. Setting price controls in the context of price differentiation risks unbalancing the current pricing equilibrium. Price caps that are based on the premise of cost reflectivity would not necessarily allow for Ramsey pricing and may result in a shift in the prices of different funeral types and impact the ability of certain consumers to purchase a funeral within their means. In addition, caps on a particular type of funeral – e.g. a ‘standard’ funeral – which do not take into account Ramsey pricing equilibria could prevent firms from recovering a greater proportion of their common costs from these standard funerals, leading to rising prices of simpler funerals across the industry as these become more cost reflective. The impact of the pandemic on the sector will also have to be considered when calculating a benchmark cap or an average revenue cap. Given the disruption to the sector and changes in costs and pricing practices, current prices would not be a stable basis for a “reasonable” price for the caps, and setting a cap based on historical prices would not be suitable for a market which may have undergone permanent changes. If price caps set by the CMA are so tight such that firms are unable to recover all their costs, this is likely to lead to market consolidation and – more likely – market exit. This could have differing impacts across towns and regions, with some areas potentially left with very limited choice. Defining services to be regulated The rapid move towards simpler funerals during the pandemic highlights one of the key difficulties in the CMA’s current remedy of capping the price of a standard service. Defining a standard funeral and associated costs will be very challenging, particularly as what is most common may change over time. Should the standard funeral be modelled on pre- or post-COVID trends? What are consumers most likely to choose in the future? Could there be a dichotomy in the market with very basic funerals / direct cremations on the one hand and large elaborate funerals on the other? The pandemic has also highlighted the very different services provided by funeral directors, even within similar funeral types. Even a direct cremation can have a very different level of service attached, as previously described. Specifying a benchmark or standard funeral type and associated price cap may not take into account the underlying levels and quality of service offered by different funeral directors and thus not compare likefor-like. Having a single price cap apply for the same funeral type could miss the fact that the underlying service and therefore cost might be very different between funeral directors, meaning some could earn excess profits whilst others are unable to cover their costs. This could lead to market exit and the reduction in consumer choice down to the very basic funerals offered by low-cost operators. Changes in the wider market The move towards the remote arrangement of funerals may bring about longer-term changes in consumer and firm behaviour. Some firms have reported to us that families now have more time to make decisions about the details of the funeral, for example where information brochures are sent ahead of the conversations with the funeral director. Families are able to look through all the options at their own speed and funeral directors have noted that sometimes more elaborate options are chosen (e.g. coffins, flowers, cortege routes) compared to when the arrangements were made over a couple of face-to-face meetings. The provision of more, informed, decision-making time may increase the ability of consumers to make good choices about the Implications of the COVID-19 Pandemic for the Funeral Director Market and the CMA Investigation - 7 - funerals they want. The provision of electronic information ahead of meetings with the funeral directors may also better enable consumers to choose between firms, thus encouraging competition. The move towards remote arrangements may well continue beyond the pandemic, with the media and firm advertising raising the profile of online/telephone arrangements, combined with the general trend towards online consumption across the economy. This may enable and encourage consumers to compare funeral directors online, and in turn may incentivise the industry to increase their online presence, including the provision of more information. This context suggests that quality regulation could be a useful
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