Alvin Roth

Why bans don’t work

bansThis month, the Brihanmumbai Municipal Corporation (BMC) has decided to suspend the sale of chicken and meat in its markets on two days (down from four days initially), during the Jain fasting period of Paryushan. Several other governments around the country have also decided to do the same.

There are has been a lot of outrage against these decisions on the social media. In Mumbai, the Maharashtra Navnirman Sena (MNS) set up a meat stall on September 10, one of the two days on which the sale was banned.

Of course MNS is a political party and was just trying to score a few brownie points with its political constituency. Nevertheless, the question that crops up here is do bans work? Take the state of Gujarat, where prohibition is in force. Does that mean that alcohol is not available in Gujarat? Anyone who has ever been to the state knows that at best it takes a couple of phone calls and a bootlegger lands up at your door with whatever you want to drink.

The consumption of alcohol is alive and kicking in the state, with the government losing out on all the money that it could have made through taxes. This money is now being made by bootleggers and the police which tends to overlook these indiscretions.

Or take the fact that in India one cannot legally bet on cricket. What has this done? It has led to the creation of a reasonably sophisticated system of betting run by illegal bookies, spread throughout the country. Every few years a betting scandal erupts, there is a lot of noise made around it, until we forget about it and move on to other things.

The way of stopping these betting scandals is to legally allow betting, as is the case through large parts of the world. The government can also make some money through taxes in the process and things don’t need to work at the underground level.

All these transactions are what economists call repugnant transactions. In economics a transaction is referred to as repugnant if “if some people want to engage in it and other people don’t want them to.”

As economist Alvin E. Roth writes in Who Gets What and Why: “Let’s consider one…domain in which repugnant transactions are common: sex. People want to have sex with each other in circumstances that society disapproves of. But when we educate people our children, pass laws, and try to control the transmission of disease, we would be foolish not to recognise that sex is a powerful force…For this reason we sometimes try to promote “safe sex” rather than abstinence.”

Along similar lines the need to eat meat, drink alcohol and gamble, may be repugnant to some, but they are also powerful forces. Certain leaders of the Jain community may not like the idea of other communities eating meat during what is a period of fasting for them. But that doesn’t mean people will stop eating meat.

Alcohol cannot be sold in the state of Gujarat because it is the state where the father of the nation Mahatma Gandhi was born, but that doesn’t mean people will stop drinking alcohol.

We may find gambling to be morally wrong, but that doesn’t mean people will stop gambling. Like sex, these are powerful forces. And banning them doesn’t help because then the activity simply moves underground.

As Roth writes: “Banning markets is just one way of trying to control them, and preventing markets is easier legislated than done.” The point being that meat will be sold illegally on days it’s banned or people will simply stock up.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared in the Bangalore Mirror on Sep 16, 2015

Does Janet Yellen know Bahl and Bansal of Indian ecommerce?

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On August 31, 2015, The Economic Times, the largest read business newspaper in the country carried an interview with Kunal Bahl, the chief executive officer of Snapdeal. In this interview Bahl claimed that: “The one thing I am very , very clear about right now is that I think we’re going to be No. 1 (in terms of sales) by March 2016….I think we’re going to beat Flipkart by then.”

Two days later on September 2, 2015 (i.e. yesterday), Mukesh Bansal, the head of commerce at Flipkart, responded in the same paper by saying: “Flipkart will sell goods worth $10 billion (Rs 65,000 crore) during fiscal 2016, and “nobody will be even half of that”…There is not a shred of doubt based on all the market numbers we have today.”

When was the last time you saw a CEO or a CXO of a brick and mortar company talk like this? Where does this confidence of Bahl and Bansal come from?
There is a basic advantage that ecommerce companies have, which the brick and mortar crowd does not. Consumers can buy many things through a single transaction. I can buy a geyser, a book case and several books, all at the same time and pay for it all at once sitting at home (or in office for that matter). I don’t have to visit different shops to buy these things.

As economist Alvin E. Roth writes in Who Gets What and Why—The Hidden World of Matchmaking and Market Design: “It looks to me like a single transaction, even though I may have bought each item from a different seller that subscribes to Amazon’s marketplace services.” Now replace the word Amazon with Flipkart or Snapdeal and the logic remains the same.

Plus, there is something called “thickness” at work here as well. As Roth writes: “The thickness of the Amazon marketplace—the ready availability of so many buyers and sellers—is self-reinforcing. More sellers will be attracted by all those potential buyers, and more buyers will come to this market place because of ever-expanding variety of sellers.”

And as I said earlier, what works in case of Amazon in the United States, also works in case of Flipkart and Snapdeal. But there is also something else that needs to be pointed out here.

Typically, the tendency is to look at India as one big market given the huge population of more than 120 crore people. But the more important question is –how many people are digitally proficient to be able to carry out ecommerce transactions on computers as well as smart phones.

And this is where things get interesting. Analyst Akhilesh Tilotia of Kotak Institutional Equities in a recent research report titled How many internet literates in India?  points out some very interesting data based on the 71st round of the National Sample Survey Organization (NSSO).

As Tilotia writes: “We note that 48.9% of the youth in urban India in the age range of 14-29 can operate a computer; this proportion falls to 18.3% in rural India. We also note that digital literacy among women trails men’s by 10 percentage-points. Even more interesting, only a quarter of those in urban Indian in the age range of 30-45 years can operate a computer, this percentage is 4% in rural India.”

It needs to be pointed out that in the NSSO survey on which this data is based, “any of the devices such as desktops, laptops, notebooks, netbooks, palmtops, smartphones, etc. were considered as computers.”

In fact, digital proficiency is significantly lower than digital literacy. As Tilotia writes: “Only around one in seven Indians can do any meaningful activity with their computers/smartphones. Urban India is better off with between a fourth and a third of its populace having dexterity to work on their digital devices; less than one in 12 rural Indians have such skills. It is quite possible to be communicative on social media without having email-writing skills or Googling skills.”

This is not the kind of data which the Indian e-commerce companies would want to take a look at.

The NSSO survey on which these numbers are based was carried out between January and June 2014. While things would have definitely improved on the digital proficiency front since then, the improvement couldn’t have been very significant.

So, given this low level of digital proficiency among Indians there has to be a limit to the size of the ecommerce market in India. But individuals who run these companies clearly don’t think that way. As Bansal of Flipkart told The Economic Times: “Flipkart is aiming to sell goods worth $100 billion in 5-7 years.”

The way things are currently going, the kind of valuations the ecommerce companies seem are getting, leads one to conclude that the investors who invest in these companies believe that Indian ecommerce companies will continue to grow at a rapid rate in the time to come.

There are regular news-reports on the front pages of business newspapers of millions of dollars of investment going into Indian ecommerce companies. But none of these news-reports ever seems to talk about the profitability of these companies.

As I have written in the past, almost all the Indian ecommerce companies are losing money big time. Most of these companies have been able to attract buyers by offering discounts on products that they sell. The only thing that has kept them going in spite of making massive losses, is the endless rounds funding that keep coming in, from venture capital and private equity firms, as well as hedge funds. And with every round of funding, the valuation of these firms also goes up.

All this money coming into Indian ecommerce is essentially because of extremely low interest rates that prevail through much of the Western world. In the aftermath of the financial crisis that started in September 2008, the Western central banks started to print money and drove interest rates to very low levels, in the hope of initiating an economic recovery. Leading the way was Ben Bernanke, the Chairman of the Federal Reserve of the United States, the American central bank. He was succeeded by Janet Yellen in 2014.

The private equity and the venture capital firms have borrowed and invested this money into Indian ecommerce companies. And it is this “easy money” from the West that has kept the loss making Indian e-commerce companies selling things on discounts, going.

The question is till when will this money keep coming in? Until very recently most economists were of the opinion that the Federal Reserve would raise interest rates from September 2015 on. Now with the massive fall in stock markets all over the world that seems unlikely.

Nevertheless, the Indian ecommerce companies are totally dependent on this “easy money” borrowed at very low interest rates. And it is this money that has kept them going. And it is this money that will keep them going. In fact, I am even tempted to ask, does Janet Yellen know Bahl and Bansal of Indian ecommerce?

The column appeared originally in The Daily Reckoning on Sep 3, 2015

Why ‘good’ restaurants make you wait

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A few weekends back I met a friend, who wanted to study economics, but ended up becoming an engineer under parental pressure. As the story often goes in such cases, he was told by this father that nobody studies “Arts” in our family.

Most Indian universities offer an economics degree under their “Arts” course. Would fathers look at their children wanting to study economics differently, if universities offered a BSc in economics rather a B.A.? I really don’t know and that is really not the subject of this column as well.

I and my friend, met for dinner at a popular restaurant in the Western suburbs of Mumbai. As usual there was a waiting time of 15-20 minutes. Given his passion for economics, this friend has the habit of asking the most unusual questions at the most unlikely places.

So, here we were standing almost on the road, waiting for a table to eat, and he asked me: “Why do restaurants make you wait?” I didn’t understand what he was really trying to ask and replied: “Well, because there is only so much space that they have and if more people turn up on a given day, someone has to wait.”

“You are not getting my point,” he replied. “What I mean is that the restaurant doesn’t benefit in any way, when more people turn up than it has space for. People waiting doesn’t benefit them in any direct way.”

“Yes. So?” I asked.

“I mean, why not just raise prices and make more money in the process. I am sure enough people would be ready to pay more, if they don’t have to wait. And those who don’t want to pay more, will drop out and go somewhere else. Simple,” he said. “Higher prices will lead to no waiting.”

We couldn’t continue the conversation because our turn to eat came and there are better things to talk about while eating than economics. Nevertheless, the question stayed with me and a few days later, I luckily discovered the answer, while reading a book by a Nobel Prize winning economist Alvin E. Roth. In Who Gets What and Why—The Hidden World of Matchmaking and Market Design, Roth provides the answer to the restaurant question.

As he writes: “Restaurants don’t just rely on ads to signal how tasty their food is, since any eating establishment can advertise that it serves good food. It’s also a part of the reason restaurants sometimes have prices low enough that long lines form outside.” And how does this help?

When a customer waits for his turn to eat he is essentially wasting time and this doesn’t help the restaurant either, as my friend had suggested. So why not just raise prices and make more money in the process? And by not raising prices why is the restaurant letting go of the money it could easily make?

As Roth explains: “That long line sends a signal that the restaurant across the street with empty tables can’t easily mimic—that is, a lot of people think this is a good restaurant, worth waiting for, and if you haven’t tried it, maybe you should get at the end of the line instead of going across the street.”

So, long lines go a long way in building the story around any restaurant.

This also possibly explains why some restaurants survive the test of time despite a fall in quality standards over the years. The lines at the door ensure that people keep coming and convince themselves that the “food” continues to be as good as it was in the past.

Further, the lesson here is that next time there is a long line at your favourite restaurant, it might just make sense to hop on to some other place in the vicinity. Chances are that the food might not be that bad. It’s just that the restaurant may have never had the benefit of long lines forming in front of it.

The column originally appeared in the Bangalore Mirror on Sep 2, 2015

I want to do frandship with you…

facebook-logoThis column should have ideally been written by a woman, given that it concerns what women experience on the social media as well as on the internet. Many women receive random friend requests on Facebook from men stating: “I want to do frandship with you,” or something like “I want to be frands with you”.

Of course it is safe to say that men who send out such requests do not really understand the basic etiquette that one needs to follow on Facebook and other social media. Their English language skills are nothing to write home about. And honestly, I am being a tad euphemistic here.

Nevertheless, there is enough anecdotal evidence to suggest that men who send out such friend requests do not really give up that easily. Even though, their friend requests keep getting rejected, they keep sending out newer ones. Some of them even end up as proper stalkers.

Why is that? Nobel Prize winning economist Alvin E. Roth has a possible explanation in his new book Who Gets What and Why—The Hidden World of Match Making and Market Design. As he writes: “Think of an Internet dating site on which women with appealing photos receive far more messages than they can answer and men find that very few of their messages draw responses. This causes men to send more, and hence more superficial, messages and women to respond to fewer and fewer of them.”

While Facebook is clearly not a dating site, Roth’s logic applies perfectly to the random friend requests that are sent out on Facebook. And this explains to a large extent why some women do not have their pictures as profile pictures on Facebook. It just attracts the wrong kind of attention.

The interesting bit is that the same phenomenon plays out in a different way on matrimonial websites as well. During the course of last week, I met two friends, who, rather late in life have started using matrimonial websites in their quest to get married quickly. The female friend complained that she was getting way too many proposals, and it had become difficult for her to separate the wheat from the chaff.

The male friend on the other hand was disappointed with his search and felt that trying to get married through matrimonial websites was a waste of time. He had been getting proposals at a very slow rate. And this was happening despite him showing interest and sending out many proposals.

So, what is happening here? As Roth writes: “At many interest dating sites…attractive women get more emails than they can answer. The men, who find that many of their emails go unanswered, react by sending more emails.”

Further, unlike approaching a woman in person, it is very easy to send across a proposal over the internet. Hence, many end up sending too many proposals. But as Roth writes in the context of dating websites (and which I feel applies equally to the Indian matrimonial websites): “These emails become less informative, because the men submitting them are less likely to study the information  contained in each woman’s profile and how best to approach her. The women in turn reply to a smaller and smaller percentages of the messages they get, and the men respond by sending even more, and even more superficial, messages.”

This essentially leads to the collapse of the matrimonial market on the internet. Given that messages can be easily sent, more and more messages are sent and ultimately nothing happens. As Roth writes: “Economists call such superficial messages “cheap talk.” When talk is cheap, it doesn’t reliably signal anything.” It leads to congestion setting in, “and that can make it impossible for participants to identify the most promising alternatives the market has to offer.” And that makes the entire situation quite tricky for both men and women looking to get married.

(Vivek Kaul is the writer of the Easy Money trilogy. He tweets @kaul_vivek)

The column appeared in the Bangalore Mirror on August 19, 2015