There was a strange campaign in India a couple of weeks back called Meter Jam. To put it in their own words:

Say No to Autos and Taxis on August 12th

Because they say “No” to you whenever they want

Shreeni thinks that banning auto stands is the solution because, according to him, the auto-driver

…is also swayed by the idea of standing with other drivers and forming a union-like structure where they can decide to charge as per their wishes.

Here’s my take:

Let’s try to understand the incentives at play here. One would imagine that the auto-driver is interested in maximizing his earnings. When an auto-driver refuses to ferry you somewhere, he is losing business. Why then, is the behavior of auto-drivers “unruly?” The auto-driver’s true cost of taking you somewhere includes not just the fuel cost but also the cost of the time taken (a function of traffic) and the expected distance/time until he finds another passenger. When an auto-driver refuses to take you somewhere, it is because he believes (rationally) that he can find another passenger soon enough to compensate for the loss. Of course, he does not have perfect information nor is he likely to think in such abstractions, but he is making a shrewd bet based on his experience.

Another reason for the “unruly” behavior is that an individual auto-driver does not “own” his reputation. Reputation for him is an externality. In other words, his behaving badly does not affect his reputation negatively but counts against auto-drivers as a whole. This is a well known problem in economics known as the “tragedy of the commons.” This is similar to what happens with pollution.

Consider Shreeni’s proposal of not allowing auto-stands. This clearly increases the costs for the auto-drivers. If that wasn’t the case, you wouldn’t see auto-drivers standing around even today. Higher costs for the auto-drivers can have one or more of the following consequences depending on the politics of the day. One, demand for even higher rates from the auto-drivers. Two, fewer autos on the road because driving an auto isn’t as profitable any more. Three, more traffic on the roads.

My recommendation, therefore, is diametrically opposite. De-regulate the system completely. Let the government not interfere with the pricing but allow and encourage corporates to own multiple autos and set their own rates. My guess is that a system similar to Meru cabs will emerge. The auto company will “own” its reputation and will incentivise auto-drivers to be more courteous. Competitive pressure will drive them to devise fare systems that are more beneficial to both themselves and the consumer. They will keep their own costs down by using technologies such as radio and phones to capitalize on their economies of scale.

I’m going to touch upon a different aspect of the draft bill, however, one that livemint picked up. The bill seems to specify that the copyright to the music must remain with the authors and lyricists – something that the recording companies are understandably unhappy about.

This is being done under the guise of empowering the artists. Here’s why this is wrong: owning the rights to a song is like owning a risky asset. There are companies willing to buy this asset from the musicians for a price. Why should the musicians not be allowed to transfer the risk? Who does it empower when you limit the options?

Granted, the one lakh car has been a very successful branding campaign and has got them a lot of publicity both in India and internationally. But there might be a more economically rational explanation as well. Tata is going to manufacture only around 50,000 Nanos a year. But the demand is likely to be far higher than supply. Tata has come up with an innovative way to capitalize on this.

Booking for the Nano closes on 25th of April, and one must pay the full price up-front to book a car. At the close of the booking, a random selection will decide who gets the cars. The remaining customers can choose to get back the money or lend it to Tata at 8%. Tata seems to be betting on the fact that a lot of people will choose the second option. This is of tremendous use to Tata which gets cheap money to finance its acquisition of Jaguar and Land Rover.

The good news is that disinflation is not likely to last long. Inflation is computed as change in the Wholesale Price Index (WPI) between one week and the same week the previous year. High price levels in June-August 2008 mean that inflation will be low during June-August 2009, a phenomenon known as the base effect.

A prolonged period of disinflation, or deflation, is harmful to the economy. At first glance, this might appear to be counter-intuitive since people can buy more with the money they already have (real balance effect). Deflation means that companies have to sell goods for less. Production will have to come down meaning that workers will have to be laid off or paid lower wages. This, in turn means that people have lesser money to repay their debts (debt deflation). With some luck, India will not enter the long and treacherous disinflationary territory.

The 700MHz band is being opened up for use by Wireless Internet Access Providers (WISPs) to provide the US consumers with a third way (phone and cable being the first two) to have broadband access to the Internet.

The FCC has been auctioning licenses for blocks of spectrum since 1994. The designs of the auctions in the past have used the latest developments in economic theory. In fact, much of the development in the theory of auctions has been influenced by the results of the FCC auctions. The advisers to the FCC have included people such as Peter Cramton and groups such as Public Interest Spectrum Coalition(PISC). You can read Cramton’s testimony to the Senate budget committee here, in which he explains the successes and failures of previous FCC auctions. He says:

FCC auctions have used a simultaneous ascending design in which groups of related licenses are auctioned simultaneously over many rounds of bidding. In each round, bidders submit new higher bids on any of the licenses they desire, bumping the standing high bidder. The auction ends when a round passes without any bidding; that is, no bidder is willing to raise the price on any license. As one license gets bid up, a bidder can shift to an alternative that represents a better value. In this way, bidders are able to arbitrage across substitutable licenses.

This auction seemed to work successfully and in Cramton’s own words, the revenues “exceeded industry and government estimates.” However, there were still problems with this design. PISC published papers in which they point out a couple of ways in which big incumbent companies (typically, monopolies and duopolies) can act so as to limit competition. They described two such strategies.

In the first strategy of “blocking bidding“, incumbents bid on licenses to deny licenses to new entrants even though they didn’t want them. Since the identity and the bid amount of each bidder was known to all other bidders, new entrants could be singled out and targeted by groups of incumbents. This strategy was quite successful. The incumbents were able able to deny any spectrum to all but two of the new entrants.

The second strategy that the incumbents used was “retaliatory bidding“. In this strategy, an incumbent goes into an auction with a set of licenses in mind. If a new entrant tries to bid on any of the licenses in this set, it is “punished” by the incumbent. The incumbent places high bids on the other licenses that the new entrant wishes to acquire. These bids are not meant to win. They are meant to increase the amount the new entrant has to pay for its licenses. The incumbent signals to the new entrants that it will not tolerate any bids on the licenses it (incumbent) wishes to acquire. The new entrants back off and the incumbents pick up what they want at a low price.

The PISC recommended that that the FCC make one important change to the design – make it anonymous. In this kind of auction, bidding is still simultaneous and carried out in multiple rounds. Bidders know only the highest bid at the end of each round, but not the identity of the bidder. It is easy to see that this design tackles both the blocking bidding and the retaliatory bidding problems. The FCC adopted this change when it auctioned the 700 MHz spectrum. The rule of silence was necessary to ensure that the identity and strategy of the bidders was not known to the others.

If you want to imagine how your news articles are going to look, take a look at Mouli’s blog. Indian Express seems to be up to the challenge. Their hoardings read “I don’t want Shakespeare to write my news.”

Having fewer words (or less words if you are a DC reader), makes a lot of economic sense. I was taking a look at some stats the other day and I found that more than 90% of DC’s revenue comes from advertisements. That would explain how DC is able to price its paper at Rs. 1 in Chennai where the incumbent Hindu charges Rs. 3.25. You can read more about this here.

If this strategy is indeed so successful and Deccan Chronicle is not really dependent on the revenue from newspaper sales, you might wonder why they charge anything for their newspapers at all. After all, the advertising rates are a function of the newspaper circulation and giving it away for free should obviously increase circulation. To most of us this seems natural since we are used to reading stuff on the internet for free because it is supported by advertising. But why do newspapers never seem to be able to go below a certain threshold when it comes to price?

The answer lies in a concept in economics called Moral Hazard. What it means in this context is that when a newspaper is priced close to zero, people will start picking up copies just for the re-sale value of the newsprint it is printed on. This, in turn, means that some of the consumers interested in buying DC for its content will not be able to pick up a copy because thera are only a finite number of copies. This is bad news for the advertisers and they will no longer be willing to pay as much for the same ad space.

An easy way to increase circulation quickly is to price at the lowest price point possible – just above the cost of scrap paper. And that’s exactly what DC is doing! And they are using increased circulation to sell more ads, leaving less room for the content. Fortunately, price is not the only thing that determines a person’s choice of newspaper although it clearly is a factor. There is definitely going to be a trend (among the new entrants, at least) to start following a similar strategy.

Clearly, this moral hazard problem does not exist on the web. Interestingly, things like a page’s search engine ranking and hence the revenue from advertisements on a page depends on the quality of the content to a much greater extent.

Taken together, do these facts mean that the primary medium for higher quality articles is going to be the web? Can you imagine a world where you read blogs for “serious” content and newspapers for “non-serious” content? Do let me know your views.

Photo: Courtesy Sans Serif