Market Segmentation

A framework to monitor the legal sector – Oxera Consulting Limited.

What does the segmentation framework look like?

To provide a practical approach to market segmentation, the framework uses easily observable characteristics, in order to capture what might cause the legal service market to function in a different way. These are:

  • Type of consumer – consumer-specific characteristics may alter the supplier – consumer relationship, and different consumers may require advice on different issues, even within a particular area of law.
  • Type of consumer problem – there is a multitude of problems on which legal advice might be sought. Since consumers cannot alter the nature of these problems, there is limited substitutability between suppliers or services. Without the ability to switch between suppliers or services, differences in market outcomes can persist, since consumers cannot switch to the service with the characteristics they prefer. Thus, providers of different services do not need to compete. For example, advice in relation to a divorce proceeding is not a substitute for property conveyancing services. Therefore, the ideal market segmentation would split between each possible type of consumer problem on which legal advice might be sought.
  • Type of legal activity – the type of legal service provided can be seen as an additional relevant distinction since this limits the extent to which suppliers can supply different legal services. For example, the market for basic advice will function differently to the market for advocacy, due to the regulatory barrier controlling who can provide advocacy services at higher courts.

While information on the type of supplier is important – termed supply side segmentation – no single supply side segmentation captures the range of different groups of suppliers competing in each market segment.

Why bother with market segmentation?

We often talk about the legal services market, yet rarely is it defined. If it isn’t defined it is impossible to understand how it changes over time. If we don’t understand how it changes over time we cannot impartially assess the delivery of the regulatory objectives. A segmentation framework supports this in the following ways:

  • Economic definition of the legal services market: By identifying the types of legal services and suppliers that consumers can switch between (ie demand-side substitution), and the circumstances in which suppliers are in competition with each other within a market (ie where either demand- or supply-side substitution occurs), legal service transactions can be grouped into different markets. Specifically:
    •  Demand side substitution – Consumers have a number of alternative options available. Choices can be both consumer and issue specific, along the lines of whether to take legal action at all; whether to handle the problem alone or seek legal advice; and which legal service supplier to use. This is common terminology in legal need surveys for individuals and we would recognise the ‘make or buy’ decision in businesses and organisations.
    • Supply side substitution – suppliers have a number of choices in the way they supply legal services. This can have two parts: First, suppliers can in some instances switch between providing different legal services; while in other circumstances practical differences or real barriers can prevent suppliers from changing the services they offer. Second, where there are few options available to the supplier, individual consumers may be able to drive a harder bargain with the supplier, reducing the cost of the service they pay.  Areas of law where this may be relevant include criminal work and public law children cases.

Economic market definition, in contrast to a profession based definition, exposes the fact that different parts of the legal profession can compete with each other within the legal services market, enhancing our collective understanding of the legal services market beyond professional boundaries.

  • Targeting of regulatory protection for consumers: Different types of consumers are exposed to different types of risks (often described as market failures) when interacting with legal services. Examples of specific market failures include:
    • Asymmetric information – the consumer may be less able than the supplier to able to judge the quality of the services provided. This can limit their ability to evaluate whether the service offers is right for their needs, at a fair price and at a sufficient level of quality.
    • Imperfect information – often there is a more general uncertainly about the type of service required. This arises since for many legal services the full benefits take time to materialise and therefore depend on currently unknown events.
    • Consumer switching and search costs – it may be costly for a consumer to gather the required information to choose effectively between different legal services and providers such that when infrequent purchases are expected choice is not well informed. Once a provider is chosen it may be costly to change provider mid service.

Put simply, an individual purchasing a one off legal service can be considered to be in a very different situation when compared to a larger business that has an in house solicitor and purchases legal services on an ongoing basis. Therefore regulatory protection should be adapted accordingly.

  • Assessing impacts of specific elements of regulation: The point of the segmentation framework is to both allow the regulatory community to assess the impacts of regulatory reform, and target regulation to ensure that it is proportionate. The process of market segmentation identifies what information is desired and where gaps lie. Over time as evidence is gathered and different segments better understood, the segmentation model will provide a collective knowledge base, enabling objective assessment of different elements of regulation.

Further information can be found in the reports section, with a full copy of the report alongside a summary of the key elements and a presentation given to the regulators as part of the regulatory standards work