High popcorn prices in cinemas

Regular working lunch at the recently opened Rajiv Gandhi International Airport in Hyderabad costs an exorbitant Rs 300 per plate! (didn't check out other prices, but am sure the mark up would be substantial) The airport operator has sought to maximize his concession revenues by selling rights to only one restaurant concessionaire in each of the four floors. The monopoly pricing power confers on the concessionaire the freedom to charge these high premiums.

The 35 km commute distance between the airport and the city center, and the uncertainties associated with traffic congestion means that passengers invariably arrive a little earlier and spend more time at the airport. This, coupled with the fact that passengers leave their workplaces or homes a good three to four hours before the scheduled flight departure, means they are more likely to have skipped their lunches. The irregular airline schedules only increases the amount of time the passenger spends in the airport. The restaurant concessionaire now has a captive market in the airport, with passengers having to spend more time than they otherwise would have. (The only danger is whether the concessionaire may have priced himself out of the market!)

Restaurants in airports is only one of many examples of such primary-secondary product linkage markets. In the airline market itself, food sales in the low-cost carriers are another example of such markets. Recent studies from Stanford and the University of California, Santa Cruz seem to suggest that high prices charged in cinema theatres for concession items like popcorn, candy and ice cream (secondary products) help keep cinema ticket (primary product) prices low. This makes it possible for more people, like the price-sensitive ones, to view cinemas. While the cinema exhibition hall owners have to share ticket prices with distributors, they keep the entire profits from sales of secondary products.

Comparing concession purchases in weeks with low and high movie attendance for a chain of movie theaters in Spain, Wesley Hartmann, associate professor of marketing at the Graduate School of Business, and Ricard Gil, assistant professor in economics at University of California, Santa Cruz, proved that pricing concessions on the high side in relation to admission tickets makes sense. The fact that concession sales were proportionately higher during low-attendance periods suggested the presence of "die-hard" moviegoers willing to see any kind of film, good or bad-and willing to purchase high-priced popcorn to boot.

Gil says, "If you want to bring more consumers into the market, you need to keep ticket prices lower to attract them. And theaters wisely make up the margin by transferring it to the person willing to buy the $5 popcorn bucket." They also found that moviegoers who purchase their tickets over the internet tend to buy more concession items than those who purchase them at the door, by phone, at kiosks, or at ATMs.

The study found that people who come to the movies in groups tend to buy more popcorn, soda, and candy. As Hartmann says, if this is true then "it may be that theaters will want to run more family- or adolescent-oriented movies to attract a more concession-buying crowd ".

The study provides strong support for adopting similar strategy in all business ventures that involve a primary and many secondary products. It is also a vindication of the captive market hypothesis, with its contention that getting consumers to the party is the important thing. Once they are there, unlike the cliched horse, getting the consumers to buy is easier! Getting them there in the first place is the challenge!

NREGS and foodgrain prices

There have been some recent reports of agriculture labour shortages and rise in the wages of agriculture labour, from many parts of the country. Given the overwhelming presence of National Rural Employment Gurantee Scheme (NREGS) in these areas, questions are being raised about the schemes contribution to these outcomes.

The NREGS is the flagship poverty alleviation program of the Government of India, which seeks to guarantee atleast 100 days of employment every year to the rural poor. It seeks to enhance livelihood security by providing assured Rs 60 per day for 100 days of employment a year to one member of every rural unemployed family

Is NREGS, atleast partially, responsible for this? Is NREGS exerting a "crowding in" effect on labour in the rural areas? Is the alternative availability of NREGS bidding up wage costs in villages? Is NREGS ultimately responsible for higher foodgrain prices? If only theoretically, all the aforementioned remains strong possibilities.

Higher labour costs will ensure that the long exploited agriculture labour will start getting their rightful wages from atleast now. But since labour is a significant component of agriculture costs, any rise in this input cost will put upward pressure on foodgrain prices. Production costs will rise, and atleast a share of the increase will be passed on to the consumers by way of higher foodgrain prices. Whether this is the sequence of events and NREGS' contribution to it, is yet to be fully analyzed.

But, higher wages for agriculture labour and higher prices for agriculture products may actually end up increasing, rather than decreasing, foodgrain production. The favorable turn in terms of trade for agriculture produce may incentivize farmers to make more investments in agriculture and increase their production.

If NREGS is indeed responsible for higher rural wages, then the scheme may have unwittingly enough achieved its objective of ensuring higher incomes for rural labour. That community assets like irrigation channels and small connecting roads have been created in the process is a bonus. But are these gains sustainable? That will be the true yardstick for measuring the success of NREGS.

There are a few other issues that needs to be analyzed to understand the full impact of the scheme. How are the increased incomes being spent? What has been its impact on agriculture production itself? What has been the impact of the scheme on socio-economic outcomes like school enrollment and retention, nutritional and health care parameters?

When oil prices rise, Americans drive less!

NYT has this graph, which is an excellent example of how consumers respond to variations in prices. With gasoline crossing $4 a gallon, and the rising price acting as a tax on consumers, Americans appear to be cutting down on their drives.

Administrative Reforms - I

"Administrative reforms" (AR) is one of the most widely debated phrases in public policy circles. No discussion about governance is complete without AR. It is often seen as the one magic wand that can solve many of the governance ills that bedevil our polity. Numerous commissions have been appointed by successive governments to study AR, and the contents of these reports get dusted up with the same frequency as the change in Governments.

The main recommendations of these AR reports are the same - transparency, accountability, decentralization, changes in recruitment process etc. AR initiated so far have sought to either reduce the bureaucracy (a hiring freeze on central government bureaucracy since 2001), decentralization of authority and devolution of powers through the 73rd and 74th amendments to the Constitution in 1992, bringing in transparency in administration by promulgation of the RTI in 2005 etc.

These are all undoubtedly important reforms, critical to infusing a spirit of responsiveness in the bureaucracy, and will surely have some impact on the larger society and polity. But beyond addressing the issues at a superficial level, they fail to contextualize the reforms and appreciate the need to link with specific outcomes. They do not address critical operational challenges faced at the cutting-edge of service delivery. Therefore, by themselves these macro-level reforms are not likely to achieve much.

Popular (and even among more informed citizens) stereotype of the reasons for the inefficiencies in our bureaucracy and polity focus only on corruption and venality of the functionaries - bureaucrats and politicians. It has been widely argued that once we bring in transparency and accountability to the system, many of these problems will get resolved by themselves, and our administration will become more efficient. But experiences from across the world would indicate that such simplified diagnosis and prescription for improving administrative effectiveness may not be fully correct. For example, the Chinese (and previously the East Asian economies) bureaucracy and polity has none of these aforementioned desirables, but is still very effective.

Recently The Economist carried an article about the Indian civil service which captured a few interesting facets of our bureaucratic system, and in particular the work of a typical District Collector. It raised a very pertinent question, "India has some of the hardest-working bureaucrats in the world, but its administration has an abysmal record of serving the public".

The Economist paints the picture of the District Collector as a very hardworking officer, struggling with the diverse and complex challenges facing his district. As the most popular chronicler of rural poverty and development in India, P Sainath informs in his popular book, "Everyone loves a good drought", though many of India's most backward districts have been administered for long years by some of the best officers of the Indian Administrative Service (IAS), they continue to remain backward. It is clear that the outcomes have not been in proportion to the efforts and expectations.

Describing the work schedule of the District Collector of Jalaun district in Uttar Pradesh, The Economist writes, "Mr Samphel reckons he spends 60% of his time dealing with individual supplicants—also outside the collectorate. As the Ambassador turns back on to the road, it is waylaid by a tractor bringing a cartload of petitioners in from a distant village. Then one of Mr Samphel's three mobile phones bleeps. Someone wants firewood; Mr Samphel calls a forestry official to relay the request. It is a hugely impressive performance. Mr Samphel works 16 hours a day, seven days a week, and reckons he has had two days off since 2003. But this is hardly an efficient way to minister to a needy population almost half the size of New Zealand's!"

Yes, that surely is not the way Helen Clark administers New Zealand. Over the coming weeks, I will attempt to capture a few vignettes of the problems and challenges facing our governance systems. The first will be about the institution of the District Collector.

Amartya Sen on food crisis

In a NYT op-ed Amartya Sen describes the ongoing food crisis in terms of the tale of two peoples,

In one version of the story, a country with a lot of poor people suddenly experiences fast economic expansion, but only half of the people share in the new prosperity. The favored ones spend a lot of their new income on food, and unless supply expands very quickly, prices shoot up. The rest of the poor now face higher food prices but no greater income, and begin to starve.

There is also a high-tech version of the tale of two peoples. Agricultural crops like corn and soybeans can be used for making ethanol for motor fuel. So the stomachs of the hungry must also compete with fuel tanks.

He writes that the present crisis is caused not so much as a result of falling production, but accelerating consumption.

Incentivizing school attendance and performance

I have argued earlier here and here that conditional cash transfer (CCT) is a more economically efficient way of transferring welfare benefits to the poor. The latest post of Gary Becker and Richard Posner debate on paying children to attend school.

As Prof Posner writes, Milton Friedman was one of the earliest proponents of direct cash transfers to replace welfare programs. His contention being that people have a better sense of their needs than government bureaucrats, so that if the government simply gave poor people money they would allocate it more efficiently than the welfare bureaucracy would do. This is the philosophy underlying the US Government's program of Earned Income Tax Credit. Any moral hazard concerns can be taken care by making the cash transfers conditional to the recipients achieving certain pre-specified outcomes.

The Mexican Government's Progressa (and Oportunidades) program of mid-nineties sought to reduce child labour and improve school enrollment rates by paying poor parents to keep their children in school and to take them for regular health check-ups. It was argued that if the children remain in school and performs well instead of going to work, the families could be compensated for the loss in their children's earnings by direct cash transfers. Studies by economists in the United States and elsewhere clearly show that Progressa has succeeded in inducing the mainly rural parents in the program to keep their children in school longer than they would have.

Taking cue from the Progressa experience, private foundations and individuals have started experimental programs in New York (New York City Opportunity program) and few other American cities that directly pay poorly-performing, older children (and not parents) to incentivize them to remain in school and improve their performance.

As Prof Becker writes, "Rewarding these poor students for better performance is similar to the tuition scholarships and stipends that colleges award to students with good grades. To earn the "pay" offered, students involved will skip school less often. They will also pay closer attention to their teachers during classes and do more homework, so that they can do better on the standardized tests that are being used to judge their performance."

The moral hazard concern with such conditional cash transfer programs is that it will encourage some children who have been doing well to lower their school performance, so that they can qualify for the program. The program therefore ends up rewarding even those children who would have achieved good performance even without the cash incentive. Therefore the challenge with administering such programs would be to identify the right target group of children.

Prof Posner sees significant incentive distortions, in both parents and children, arising from such cash transfer schemes. He claims that such programs will continue the neglect of public schools, which may be the cause of the poor performance and drop-outs. He also foresees substantial transaction costs associated with implementing and monitoring such programs. Further, such programs do not mandate any sunset clauses which will end the cash support to the child.

However, these cash transfer programs can be more effective in promoting education in socio-economic contexts like in many Indian states, without stoking off incentive distortions. In many parts of the country, especially among specific communities, girl children drop out from schools very early. Further, during the harvest season, the parents have an incentive to take their children out of school so as to work in the fields. It is also true that many of these practices and trends cover the major portion of children in such areas that it may not be worth the transaction costs to target and exclude the small minority who attend school.

In such circumstances, it is important that the incentives be structured appropriately to meet the objectives. There are many different ways in which the cash transfers can be structured. The amount of cash transferred can increase with every class, and can culminate as a scholarship to attend professional courses. The cash transfer can be graded into a few categories, so as to incentivize children to perform well. Therefore while the best performers get the maximum cash transefr, the worst get the least. It may also be worth increasing the cash incentives for the worst performers in each class, so as to incentivize them to perform better in the next higher class. Further, in many backward areas of certain states, the enrollment rates are so low that merely keeping children at school is itself a challenge.

The transaction costs associated with such programs can be minimized by involving the women Self Help Groups (SHGs). Apart from the child attending school and performing well, such cash transfer can also be made conditional to the mother being a member of an active SHG. The cash transfer can then be made to the bank account of the SHG. This transfer can be made quarterly, based on the attendance and test results of the child. In order to avoid incentive distortions like grade inflation, there should be relative grading of the performance of children.

Such policies will have to be formulated by carefully analyzing the statistics available and tailoring programs to suit the specific local requirements. For example, the cash transfer can kick in at those classes where girl children normally drop out or for those months when children drop out for harvest. But given the different social context, unlike the New York program, all the cash transfers should be made to the parents.

Case for Gasoline Tax

Robert Frank makes out an excellent theretical case for taxes in general under certain circumstances, and gas tax in particular. Quoting Adam Smith, he argues that Smith understood that the invisible hand is often benign, but not always.

The exceptions occur when the costs incurred by the producers are not the only costs and/or the benefits enjoyed by the consumers are not the only benefits. In other words there are significant externalities, and especially negative ones. In such cases, the Marginal Social Cost (MSC) is not equal to Marginal Cost (MC) for the producer and the Marginal Social Benefit (MSB) is not equal to the Marginal Benefit (MB) for the consumer. Though equilibrium is reached when the MC equals MB, it is not an efficient equilibrium. He writes,

"The market reaches equilibrium when the cost of producing the last pound is exactly equal to its value. If the costs incurred directly by sellers are the only relevant costs of expanding potato production, and if the benefits to potato buyers are the only relevant benefits, the invisible hand gets things just right. The production and consumption of many other goods, however, generate costs or benefits that fall on people besides buyers and sellers. Producing an extra gallon of gasoline, for example, generates not just additional costs to producers, but also pollution costs that fall on others.

As before, market forces cause production to expand until the seller’s direct cost for the last unit sold is exactly the value of that unit to the buyer. But because each gallon of gasoline also generates external pollution costs, the total cost of that last gallon produced is higher than its value to consumers. The upshot is that gasoline consumption is inefficiently high. That simple example captures the classic breakdown in the invisible hand when a product’s market price doesn’t reflect all its relevant social costs and benefits. In such cases, the simplest solution is to discourage consumption by taxing it...

That the invisible hand often breaks down is actually good news. After all, we need to tax something to pay for public services. By taxing forms of consumption that generate negative side effects, we could not only generate enough revenue to eliminate budget deficits, but also help steer resources toward their most highly valued uses.

Because such taxes make the economy more efficient, it makes no sense to object that they impose hardships on low-income families. Again, an efficient policy is one that maximizes the size of the economic pie. And with a bigger pie, it’s always possible for everyone to get a bigger slice."