Tag: price discrimination

Opting Out of Opt Ins

I’m conflicted about using Zepto (or its substitutes) for a variety of reasons, but these days, during the summer, I think it is a Most Magical Thing. The ability to order pretty much anything you want, from the comfort of your home, is a wonderful thing – and especially so when the world outside resembles the middle of a 250 degree oven.

And so when Zepto introduced Zepto Pass, I was more than happy to sign up:

Quick commerce firm Zepto on Thursday officially announced the launch of its paid subscription service—Zepto Pass—that will offer greater discounts to consumers, ratcheting up competition in India’s growing quick commerce market.

“The company has piloted Zepto Pass with 5% of its user base for a month and seen rapid adoption—almost a majority of orders came from Zepto Pass subscribers within two weeks during the pilot,” it said in a statement.

According to the company, those who subscribed to the Zepto Pass increased their spending on the app by over 30% and showed a 10% increase in monthly retention. The subscription, priced between 19 and 39 rupees per month, for a majority of customers, offers unlimited free deliveries and up to 20% off on grocery items.

There’s lots to talk about with Zepto, and most of all their pricing. For example, at least in my case, free unlimited deliveries aren’t really free. They are free post a minimum order value (one hundred rupees) and the 20% off offer kicks in only if your order is above six hundred rupees.

But as a student of behavioral economics, I found this to be the most fascinating bit:

For folks who know me (and what I look like), the swimming cap isn’t for me.

But that’s not the most fascinating bit.

The most fascinating bit is the fact that delivery is free, but only if I “apply” the “Free Delivery on this order” coupon. In other words, I first pay what I do to get unlimited free deliveries – this is the Zepto Pass.

But that isn’t enough. I also have to then remember to apply a coupon in order to unlock free delivery. In other words, I have to jump through a hoop to get something that I have already paid for.

Why introduce this friction? Which idiot will choose to not opt for this coupon after explicitly paying for it upfront?

The kind of idiot too busy to notice that one additional button has to be pressed, of course. In other words, a person too busy to sweat over the fine print. What’s an additional thirty rupees off a base value that is around two to three hundred rupees?

This way, not only does Zepto get the up front payment for the Zepto Pass membership, but they also get to collect the delivery fee from at least some of the folks who have paid so as to get… free deliveries.

This is, of course, exactly what opt-in/opt-out and sludge are all about.

But knowing what to call it, and understanding why something is done is a far cry from calling it a good practice. This, I’m sorry to say, does not leave a customer with a good impression.

Don’t get me wrong, I’m not writing this post out of outrage, nor am I demanding my money back, or demanding that Zepto be sued.

Far from it.

But would I recommend Zepto to you, or will I be tempted to pay for Zepto Pass next month?

Far from it.

On True Roles

Arnold Kling has a nice post up on his Substack about “The True Role of the Central Bank“.

He was asked recently about three ideas that he (Arnold Kling) is known for, and these are the three that he came up with:

  1. Subsidize demand and restrict supply: Government intervention might well be thought of as the subsidization or provisioning of what the market fails to provide. But in practice, he says, the political process tends to be controlled by incumbent producers or owners. These guys are going to lobby the government for subsidized demand and restricted supply. He cites the example of housing: subsidize demand (subsidized home loans, for example), and restrict supply (zoning restrictions). Might higher education be another? Do we end up restricting the supply of quality higher education, and subsidizing demand for it by giving subsidized student loans?
    If you distrust the private sector, now would be a good time to say, “Hah! See? Big bad incumbents derail well-meaning government”
    If you distrust the government, now would be a good time to say, ”Hah! See? Government is as corrupt as big bad incumbents”
    If you agree that incentives matter, you might want to think about how to redesign various systems with better incentive design front and center. But that’s boring work. Saying “Hah! See?” is much easier.
  2. His second idea is that “price discrimination explains everything”. Given high fixed costs in so many different industries (especially Internet-based businesses), the marginal cost of serving an additional consumer is zero. So if marginal-cost pricing makes no sense, what to do? Announce Big Billion Day sales, for example. How’s that price discrimination, you say? That’s just low prices all around for all goods, you say? Well, what about the rest of the days in the year, when the Big Billion Day sale isn’t around? Who do you think is buying then? Are those folks paying the same price for the same good? And that’s just one example. You could teach a semester’s worth of micro by using nothing more than the Amazon app on your phone!
  3. And his third idea is to do with the true role of the central banks. In the 2008 financial crisis, he says, the main concern of the Fed wasn’t forestalling a recession, but rather to focus on the health of the primary dealers. Or more simply put (although you should read the whole blog, as always), the central bank’s top priority is “always going to be enabling the government to borrow more money”. His last paragraph is worth quoting in full:
    “The Fed’s job is to make sure that the Treasury can market its debt. For that purpose, it has to be much more concerned with keeping banks healthy than with hitting a target for inflation, unemployment, nominal GDP, or any other supposed goal.”

Fascinating ideas, all of them. But the last one in particular mad me think about the phrase “the true role” more generally.

What is the true role of:

  1. Educational institutes?
  2. Hospitals?
  3. The Patenting System?
  4. YouTube?
  5. Students?

Ask yourself, and the people around you, these questions. And add to the list! Try answering them yourself. See if the answers differ, and ask yourselves what that reveals about the items on these lists, and about the respondents.

Microeconomics and Credit Card Reward Points

A lovely little article in the New York Times is worth a ponder, especially if you are a student of microeconomics:

There’s an undeniable feeling of excitement when you turn your daily credit card swipes at Starbucks into first-class airfare or a weekend jaunt to Costa Rica. Thanks to mobile banking and the ease of autopay, you can scrupulously avoid any additional costs by paying your monthly bill in full. Free flights and exclusive discounts abound.
Something for nothing, right?
Not exactly nothing. Credit card perks for educated, usually urban professionals are being subsidized by people who have less. In other words, when you book a hotel room or enjoy entry to an airport lounge at no cost, poor consumers are ultimately footing the bill.

https://www.nytimes.com/2023/03/04/opinion/credit-card-rewards-points-poor-interchange-fees.html

As you probably already know, one can “earn” reward points for spends on your credit card. You can then use these points to buy stuff, or earn cashbacks on these points, or spend them at partner stores. And there are other perks and benefits too. If you’ve travelled through an Indian airport, you might have seen the crowd waiting to get into an airport lounge – more often than not, access is tied to the kind of credit card you have in your wallet.

But remember, there is no such thing as a free lunch. You may not be paying for these perks as a credit card holder, but one of the first lessons of economics is that somebody, somewhere, is paying for it. So who is paying, in this case? As the last sentence in the excerpt makes clear, according to the article, that someone is the group of poor consumers.

Some background, based partially on the article in question, and partially on my own understanding of this space:

  1. Richer consumers are likely to spend more, but tend to not revolve much, if at all. To this group of consumers, a credit card is a way to get a (up to) 45 day interest free loan, with the added bonus of these reward points to boot. Remember, incentives matter – and these reward points are the carrot that is offered to people in order to get them to sign up.
  2. Dangling these reward points as a carrot makes business sense, for that allows a credit card company to sign up folks who will spend more via these credit cards. Credit card companies make money when people “revolve” – that is, when they spend using their credit cards, but do not pay up the entirety of their credit card bill on time. How much money do these companies make? Here, take a look.
  3. So consumers who take a credit card, spend a lot on it, and pay back the entirety of their credit card bill – these kinds of customers are actually a loss-making proposition for the credit card company.
  4. Consumers who spend a fair bit, find themselves unable to repay the entirety on time, and end up paying over months (if not years) – these customers are where the credit card companies earn their bread and butter (and jam and peanut butter, while they’re at it).
  5. Consumers who borrow a lot using their credit cards, and default on these loans – these are the very worst type of consumers for credit card companies. Risk departments in such firms exist to predict which consumers should be denied access to credit cards, and which of the existing customers are likely to default on their credit card loans.
  6. But broadly speaking, the NY Times article says that it is pt. 4 consumers (and pt. 5 consumers) who end up paying for the freebies that pt. 3 consumers enjoy. (but also see below, after this section)
  7. In addition, another way to make money for these credit card companies is to charge higher credit card processing charges to all consumers. This fee changes from country to country, but as a thumb-rule, assume it to be around 1-2% of each transaction. That’s not an exact estimate, but good enough for us over here. Rewards to specific folks, to be offset by diffusing the costs of offering these rewards across a much wider group, in other words. And note that merchants (who are charged these fees) will usually pass these fees on to the consumers. See here, for example.
  8. A 1-2% increase in price may not be the end of the world if your income is high enough – it is an inconvenience, not a crisis. But for low income earners, already on a tight budget, this price increase across all transactions can bite a fair bit.
  9. An out and out free market economist might say that this is fine, the market will work itself out. That is, if this 1-2% charge is an act of rent collection, new entrants in such a market will end up charging lower to no fees, and incumbents will be forced to respond by lowering their own fees. That’s econ 101, but life is more complicated than that.
  10. And that is a good first-pass answer, but as many people will tell you, markets don’t always work as designed or intended. Incumbents will go out of their way to prevent new entrants (through lobbying, through pricing, through R&D, and through a dozen different ways), which is why regulation is important.
  11. But will regulators do what they’re supposed to? What are their incentives? How can we make sure that regulation will be balanced between the interests of the incumbents, the new entrants, the potential entrants, and the customers? Hello, industrial organization, and hello, public choice.
  12. What is the role for government in all of this? In terms of participation (think UPI, for example, but note that this is a complicated story in its own right), in terms of regulation (both from a domestic and international financial markets perspective) and in terms of oversight?

All these points (and I hope you come up with more) are worth thinking about as a student. Remember, these points aren’t proven facts – they are a summary in part of the article an in part of my own reflections for having read the article. Discussions such as these are a great way to outline a research agenda – but that is when the job of a researcher begins. Can we convert these points into testable hypotheses? Can we get data to prove/disprove these hypotheses? Can that data then be used to reach a definitive conclusion? Can that conclusion be used to formulate policy, or start a business?

In terms of research about this topic, sample this from the conclusion of a paper on the topic: “While credit card rewards are often framed as a “reverse Robin Hood” mechanism in which the poor subsidize the rich, our results show that this explanation is at best incomplete.”

But also from the very last paragraph of the same paper:

We conclude by documenting that the costs and benefits of credit card rewards are unequally distributed across geographies in the United States. Credit card rewards transfer income from less to more educated, from poorer to richer, and from high- to low minority areas, thereby widening existing spatial disparities.

https://www.federalreserve.gov/econres/feds/files/2023007pap.pdf

And here’s the link to a directive from the RBI about the issuance of and conduct regarding credit and debit cards in India.

Homework: who (ultimately) pays for CRED from a distributional perspective? Whatever your answer, explain your reasoning, and either provide data to back up your arguments, or explain what kind of data you would need to research this question further.

Try discussing this question with your friends and your professors (including ChatGPT, and yes, you should be thinking of it as one of your professors) – it will be a great way to learn the nuances of microeconomics!

My thanks to Mihir Mahajan for suggesting this topic.

EC101: Links for 10th October, 2019

  1. “Coase’s originality was not in his reasoning, but in recognizing that economic exchange is not the mere trading of physical goods but trading rights to property or rights to engage in certain types of conduct affecting property.”
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    Was Ronald Coase the first to come up with the Coase theorem?
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  2. “However, the joy of this book is less in the big picture than in the detail. And what a lot of it! The mind boggles at Smil’s extensive reading and absorption of information. We get the speed at which marathons are run – over the entire course of human history; the growth rates of piglets and weight of chicekns over time; sales of small non-industrial motors over time; the envelope for the maximum speed of travel; Kuznets cycles; Zipf’s law for city size…. The middle section of chapters offer a fantastic overview of technical progress over long periods in a wide range of technologies. I love all this detail.”
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    Diane Coyle thoroughly approves of Growth and Civilization.
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  3. “When a daughter is married, we do worry about her future. But why should I worry when the government of India is my son-in-law who married my daughter Syndicate Bank,” asked the late Tonse Madhav Ananth Pai in 1969, in the aftermath of the nationalization of the first-generation private-sector banks. Fondly known as “Brahma of Manipal”, Pai was the founding father of Syndicate Bank in 1925.”
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    A lovely read on bank mergers, bank nationalization and banks from a particular part of Karnataka.
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  4. “This is where the popcorn enters the picture. Pricey popcorn makes those lower ticket prices possible, And that is why you should buy popcorn at the movies.”
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    Expensive popcorn? Uh, no, cheap movie tickets. Yes, really. Cheap for whom, you ask? Welcome to microeconomics.
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  5. “This leads to the question: Why try these markets at all? This is quite similar to creation of super highways which help reach destinations much quicker but lead to accidents as well. Should we then not create highways?Policies always raise such trade-offs and hopefully, the regulator will take steps which minimise the negative aspect of creation of these markets.”
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    Amol Agarwal, in Moneycontrol, on securitization in real estate loans in India. Me, I think this is not such a great idea.