Slightly dated post - but goes to show that this is an interesting topic.
http://www.marginalrevolution.com/marginalrevolution/2010/04/are-taxicabs-allocated-optimally.html
The next big question that is intriguing is that of pre-paid autos. Are they efficient - both from the demand and supply point of view? If that be so, then why not create multiple such hubs around the city? I suspect that they may not be an efficient as it sounds. Food for thought ...
Thursday, July 22, 2010
Thursday, July 15, 2010
Monday, July 12, 2010
Gods in the stock markets?
We are now bent upon taking the concept of divine intervention to a new level.
http://timesofindia.indiatimes.com/Biz/India-Business/Trust-moves-HC-seeking-demat-accounts-for-Hindu-deities/articleshow/6159083.cms
http://timesofindia.indiatimes.com/Biz/India-Business/Trust-moves-HC-seeking-demat-accounts-for-Hindu-deities/articleshow/6159083.cms
Friday, July 9, 2010
Breaking the auto cartels?!
Another update on the market for autorickshaws. The other day, we had to take an auto – and we walked up to the ‘auto-stand ‘ (essentially, an informal gathering of auto-rickshaws, ostensibly to provide a way for people to reduce the costs of seeking out an auto – which makes sense, on the face of it). When we asked for a ride, there was a quick, impromptu huddle among the auto drivers and they came back with an atrociously high quote and needless to say, refused to go by the fare meter. Clearly, cartelization was at work here. Note that this is independent of a competitive equilibrium for the demand-supply of autos that may exist at the city level (which I had mentioned earlier). This is what may be called a positional monopoly which would come into play where active collusion drives up the prices.
Under classical micro-economic theory, as the number of suppliers of a good or service increases, there comes a point where it is no longer possible to form cartels as the cost of cartelization becomes prohibitively high. As with most things about classical micro-economics, rarely ever happens in real life.
Which then brings us to a policy question – is there any way to solve this problem or are we as consumers of this service, doomed to suffer? One way to enable this would be to disallow ‘auto-stands’, which would make it difficult to create the situation for cartels to form in the first place. Taking this one step further, it would be even better to force the auto/taxi drivers to keep driving around (rather than waiting at a place). In addition to preventing them from forming pools of cartels, it would also create a very strong incentive for the drivers to pick up fares as and when they are available – following the simple logic that it is better to drive around on a fare rather than incurring the marginal costs of driving around without any revenues. Clearly a desirable solution as far as the consumers are concerned – and to make it equitable, the drivers have to be compensated, the only way for that to happen is to allow a higher fare/unit distance, which will also create a further incentive not to drive around empty, while compensating for the incremental marginal cost that they have to incur for not being allowed to wait at a place.
Meanwhile, now you have the answer why the taxi and auto drivers prefer to create these ‘stands’ , which by the way, tend to be more common in places where general enforcement is poor (hence you would see a higher number of stands in places where the metering systems do not exist. In Delhi for instance, the ‘taxi stand’ is an integral part of most neighbourhoods).
And finally, what did we do that day to get a better deal? Just walked down a short-distance around the block and waited (out of sight of our predatory monopolists) – a short wait later, one auto-driver came by and offered to take us on the meter fare.
Under classical micro-economic theory, as the number of suppliers of a good or service increases, there comes a point where it is no longer possible to form cartels as the cost of cartelization becomes prohibitively high. As with most things about classical micro-economics, rarely ever happens in real life.
Which then brings us to a policy question – is there any way to solve this problem or are we as consumers of this service, doomed to suffer? One way to enable this would be to disallow ‘auto-stands’, which would make it difficult to create the situation for cartels to form in the first place. Taking this one step further, it would be even better to force the auto/taxi drivers to keep driving around (rather than waiting at a place). In addition to preventing them from forming pools of cartels, it would also create a very strong incentive for the drivers to pick up fares as and when they are available – following the simple logic that it is better to drive around on a fare rather than incurring the marginal costs of driving around without any revenues. Clearly a desirable solution as far as the consumers are concerned – and to make it equitable, the drivers have to be compensated, the only way for that to happen is to allow a higher fare/unit distance, which will also create a further incentive not to drive around empty, while compensating for the incremental marginal cost that they have to incur for not being allowed to wait at a place.
Meanwhile, now you have the answer why the taxi and auto drivers prefer to create these ‘stands’ , which by the way, tend to be more common in places where general enforcement is poor (hence you would see a higher number of stands in places where the metering systems do not exist. In Delhi for instance, the ‘taxi stand’ is an integral part of most neighbourhoods).
And finally, what did we do that day to get a better deal? Just walked down a short-distance around the block and waited (out of sight of our predatory monopolists) – a short wait later, one auto-driver came by and offered to take us on the meter fare.
Wednesday, May 19, 2010
Future of book publishing?
Follow-up to an earlier post. The book publishing business is clearly an opportunity waiting to be exploited. The current economics of publishing business is clearly skewed against the content creators and towards the publishers. In its current balance of power, the publisher premium for risk aggregation and distribution costs has eaten into the content creator - i.e. the market seems to be rewarding the former over the latter, something that clearly does not make sense in case of an artistic endeavor.
As with a lot of markets, the internet has the potential of shaking this up - yet another demonstration of the long tail effect. One such start-up is http://www.fastpencil.com/
The publishing space is an interesting space to watch out for over the next few years.
As with a lot of markets, the internet has the potential of shaking this up - yet another demonstration of the long tail effect. One such start-up is http://www.fastpencil.com/
The publishing space is an interesting space to watch out for over the next few years.
Saturday, May 15, 2010
How many autos is too many autos?
Anyone who has had to negotiate an auto-rickshaw fare in places like Chennai or Delhi knows that it is an experience that is highly unsatisfying, to say the least. Since there is no metering system in place, it is purely left to your negotiation skills, where the odds are stacked against you. You only have a vague idea of the distance and even little idea of what a reasonable fare per kilometer ought to be. In a perfect market, you can have multiple auto drivers bidding to meet your demand in a reverse auction mechanism which would settle the fare at the marginal cost. However, anyone who has tried that strategy with a clique of auto-drivers on a street corner in Chennai will testify that nothing could be farther from the truth - there is a well established cartel which controls the price bands. The only possible upside of these transactions is that once you have a rate agreed upon, it is the auto driver has every incentive to put you to your destination in the shortest distance and time possible.
Cities like Bangalore and Bombay, on the other hand, have a metering system in place. While it is vastly superior as a pricing mechanism, it can lead to other distortionary actions as well. For instance, once an auto driver has a passenger, there is clearly an incentive to maximize the distance covered in travelling from point A to point B since the alternative for the driver would be waiting for a passenger without any marginal revenues. These is even more so when there is an excess supply of autos which would create an incentive for the driver to 'hold on' to a passenger as long as possible. There are two ways to counter this: the first one is to offer a minimum guaranteed fare for the auto driver. In Bangalore, this is fixed at 2 km i.e. you have to dish out 2km worth of fare even if you need to travel less than this distance. This could act as an incentive for the driver to keep 'rotating' passengers, under the assumption that there is a possibility of landing up with short-distance rides. In other words, one way to create a dis-incentive for the drivers to take their passengers for a ride (literally!) could be to increase the guaranteed base fare.
However, there is a trickier problem at hand - if there is a supply glut (i.e. too many autos chasing too few passengers), it is likely to encourage the drivers to hold on to a passenger as long as possible, since in the absence of a point-to-point fare negotiation option, the only alternative to maximize revenue is to milk distance from each captive passenger. The opposite situation of too few autos is clearly undesirable. And that begs the question - how do we know the optimal number of autos required to serve a city? The simplistic answer would be to let the market decide but that is clearly not so straightforward in a market where the entry and exit costs are non-zero. In fact, the entry costs are quite high - the cost of procuring an auto, a driving license and then a license to operate the auto. The exit costs, meanwhile, could end up being quite high when the auto is bought on a loan (which is usually the case) and any exit from the market could end up being an expensive proposition, which often ends up forcing them to continue in the market even though it may not be economically viable.
One potential way to get around this supply-demand imbalance could be to make the auto-licenses transferable in an open auction market (like a secondary market for equities). This would essentially give each auto-license owner the right to auction it in this market, subject to a floor price (which would be equal to the cost of a fresh license). The premium at which the licenses would trade could then be a good indicator of the supply-demand gap. Thus, when the premium starts increasing, the government could issue fresh licenses, bringing the premium down. This has the clear advantage of the market determining the supply-demand equilibrium for autos in any city and would be a clear leg up over the current system of a government issuing licenses without any particular method of arriving at the optimal number.
And so, the question is not to ask 'how many autos should Bangalore have' but to create a mechanism by which the market will determine the right number. Would that mean that this proposed system could create an economic haven where you can always get the auto who would take you to your destination in the shortest possible route? Now that is like expecting economic theory to predict human behavior!!
Cities like Bangalore and Bombay, on the other hand, have a metering system in place. While it is vastly superior as a pricing mechanism, it can lead to other distortionary actions as well. For instance, once an auto driver has a passenger, there is clearly an incentive to maximize the distance covered in travelling from point A to point B since the alternative for the driver would be waiting for a passenger without any marginal revenues. These is even more so when there is an excess supply of autos which would create an incentive for the driver to 'hold on' to a passenger as long as possible. There are two ways to counter this: the first one is to offer a minimum guaranteed fare for the auto driver. In Bangalore, this is fixed at 2 km i.e. you have to dish out 2km worth of fare even if you need to travel less than this distance. This could act as an incentive for the driver to keep 'rotating' passengers, under the assumption that there is a possibility of landing up with short-distance rides. In other words, one way to create a dis-incentive for the drivers to take their passengers for a ride (literally!) could be to increase the guaranteed base fare.
However, there is a trickier problem at hand - if there is a supply glut (i.e. too many autos chasing too few passengers), it is likely to encourage the drivers to hold on to a passenger as long as possible, since in the absence of a point-to-point fare negotiation option, the only alternative to maximize revenue is to milk distance from each captive passenger. The opposite situation of too few autos is clearly undesirable. And that begs the question - how do we know the optimal number of autos required to serve a city? The simplistic answer would be to let the market decide but that is clearly not so straightforward in a market where the entry and exit costs are non-zero. In fact, the entry costs are quite high - the cost of procuring an auto, a driving license and then a license to operate the auto. The exit costs, meanwhile, could end up being quite high when the auto is bought on a loan (which is usually the case) and any exit from the market could end up being an expensive proposition, which often ends up forcing them to continue in the market even though it may not be economically viable.
One potential way to get around this supply-demand imbalance could be to make the auto-licenses transferable in an open auction market (like a secondary market for equities). This would essentially give each auto-license owner the right to auction it in this market, subject to a floor price (which would be equal to the cost of a fresh license). The premium at which the licenses would trade could then be a good indicator of the supply-demand gap. Thus, when the premium starts increasing, the government could issue fresh licenses, bringing the premium down. This has the clear advantage of the market determining the supply-demand equilibrium for autos in any city and would be a clear leg up over the current system of a government issuing licenses without any particular method of arriving at the optimal number.
And so, the question is not to ask 'how many autos should Bangalore have' but to create a mechanism by which the market will determine the right number. Would that mean that this proposed system could create an economic haven where you can always get the auto who would take you to your destination in the shortest possible route? Now that is like expecting economic theory to predict human behavior!!
Wednesday, May 12, 2010
Wisdom of crowds on the roads?
My daily commute takes me on a route which has a very narrow bridge on a two-way road - just enough room for cars to squeeze through in one direction. This obviously creates a huge requirement for spontaneous co-operation among the drivers since there is usually traffic flowing in both directions. Not an easy thing to do in India where we are notoriously poor when it comes to sharing of scarce resources, esp road space. Obviously the best solution to this would be
an enforcement mechanism like a traffic signal that regulate the flow of traffic in both directions. For some unfathomable reason, the boffins at the traffic department have not yet thought it necessary to provide that. And so that leaves it to the 'Wisdom of Crowds'. If all the drivers were homo economicuses (economicii?) then they would have done the most optimal thing to do - that is to follow an alternating strategy - one car at a time in each direction. This would even out the flow in both directions and most importantly, make it a predictable process where the costs (of waiting) are evenly spread across all the parties. Obviously - this does not happen.
What actually happens is rather intriguing. Let's say that the vehicles are flowing in one direction and there is no backup from the opposite direction. All is well - until the queue starts building up in the opposite direction. At this point, it is completely left to an individual driver's selfless act of
stopping and letting the opposite side start. From that point onwards, it is left to the random occurrences of altruism from drivers in both directions, until there is no backlog in any one direction. Not a very rational process - since there is clearly no incentive for any driver to stop voluntarily because by doing that, she would have selected a high cost option (of waiting) as against the zero cost option (in units of waiting time) of driving through. However, someone or the other ends up doing that each time and what's more, this seems to settle down to a fairly predictable pattern. I have noticed that after 4-5 cars, the opposite side takes over. Which is remarkable since this essentially means that an altruist emerges for every 4-5 drivers. Is it that the drivers, battered by the abysmal infrastructure that passes for our road network, spontaneously arrive at this solution, i.e. is there really a 'wisdom of crowds' phenomenon working here? And then you begin to wonder - why doesn't this happen at all other bottlenecks? For instance, when a traffic signal fails (a not-infrequent occurrence!) then there is almost always a logjam and there is no such self-regulating flow mechanism that emerges.
The only possible explanation is that in case of the bridge, given that it is a predictable situation (the flow problem repeats itself every day), it is in each commuter's 'enlightened' self-interest to contribute to solving the problem. If that be so - why have traffic rules at all? Would a completely self-regulating mechanism appealing to the collective self-interest of the commuters work?? Or is there a tipping point beyond which aggregated individual behavior descends into chaos?
an enforcement mechanism like a traffic signal that regulate the flow of traffic in both directions. For some unfathomable reason, the boffins at the traffic department have not yet thought it necessary to provide that. And so that leaves it to the 'Wisdom of Crowds'. If all the drivers were homo economicuses (economicii?) then they would have done the most optimal thing to do - that is to follow an alternating strategy - one car at a time in each direction. This would even out the flow in both directions and most importantly, make it a predictable process where the costs (of waiting) are evenly spread across all the parties. Obviously - this does not happen.
What actually happens is rather intriguing. Let's say that the vehicles are flowing in one direction and there is no backup from the opposite direction. All is well - until the queue starts building up in the opposite direction. At this point, it is completely left to an individual driver's selfless act of
stopping and letting the opposite side start. From that point onwards, it is left to the random occurrences of altruism from drivers in both directions, until there is no backlog in any one direction. Not a very rational process - since there is clearly no incentive for any driver to stop voluntarily because by doing that, she would have selected a high cost option (of waiting) as against the zero cost option (in units of waiting time) of driving through. However, someone or the other ends up doing that each time and what's more, this seems to settle down to a fairly predictable pattern. I have noticed that after 4-5 cars, the opposite side takes over. Which is remarkable since this essentially means that an altruist emerges for every 4-5 drivers. Is it that the drivers, battered by the abysmal infrastructure that passes for our road network, spontaneously arrive at this solution, i.e. is there really a 'wisdom of crowds' phenomenon working here? And then you begin to wonder - why doesn't this happen at all other bottlenecks? For instance, when a traffic signal fails (a not-infrequent occurrence!) then there is almost always a logjam and there is no such self-regulating flow mechanism that emerges.
The only possible explanation is that in case of the bridge, given that it is a predictable situation (the flow problem repeats itself every day), it is in each commuter's 'enlightened' self-interest to contribute to solving the problem. If that be so - why have traffic rules at all? Would a completely self-regulating mechanism appealing to the collective self-interest of the commuters work?? Or is there a tipping point beyond which aggregated individual behavior descends into chaos?
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