Who do you subsidise?

One basic rule of pricing is that it is impossible for all buyers to have the same consumer surplus (the difference between what a buyer values the item at and what he paid). This is because each buyer values the item differently, and is thus willing to pay a different price for it. People who value the item more end up having a higher consumer surplus than those who value it less (and are still able to afford it).

Dynamic pricing systems (such as what we commonly see for air travel and hotels) try to price such that such a surplus is the same for all consumers, and equal to zero, but they never reach this ideal. While the variation in consumer surplus under such systems is lower, it is impossible for it to come to zero for all, or even a reasonable share of, customers.

So what effectively happens is that customers with a lower consumer surplus end up subsidising those with a higher consumer surplus. If the former customers didn’t exist, for example, the clearing price would’ve been higher, resulting in a lower consumer surplus for those who currently have a higher consumer surplus.

Sometimes the high surplus customer and the low surplus customer need not be different people – it could be the same person at different times. When I’m pressed for time, for example, my willingness to pay for a taxi is really high, and I’m highly likely to gain a significant consumer surplus by taking a standard taxi or ride-hailing marketplace ride then. At a more leisurely time, travelling on a route with plenty of bus service, I’d be willing to pay less, resulting in a lower consumer surplus. It is important to note, however, that my low surplus journey resulted in a further subsidy to my higher surplus journey.

When it comes to markets with network effects (whether direct, such as telecommunications, or indirect, like any two-sided marketplace), this surplus transfer effect is further exacerbated – not only do low-surplus customers subsidise high-surplus customers by keeping clearing price low, but network effects mean that by becoming customers they also add direct value to the high surplus customers.

So when you are pleasantly surprised to find that Uber is priced low, the low price is partly because of other customers who are paying close to their willingness to pay for the service. When you pay an amount close to the value you place on the service, you are in turn subsidising another customer whose willingness to pay is much higher.

This transfer of consumer surplus can be seen as an instance of bundling, but from the seller’s side. Since a seller cannot discriminate effectively among customers (even with dynamic pricing algorithms such as Uber’s surge pricing), the high-surplus customers come bundled with the low-surplus customers. And from the seller’s perspective, this bundling is optimal (see this post by Chris Dixon on why bundling works, and invert it).

So the reason I thought up this post is that there has been some uncertainty about ride-hailing marketplaces in Bangalore recently. First, drivers went on strike alleging that they weren’t being paid fairly by the marketplaces. Then, a regulator decided to take the rulebook too literally and banned pooled rides. As i write this, a bunch of young women I know are having a party, and it’s likely that they’ll need these ride-hailing services for getting home.

Given late night transport options in Bangalore, and the fact that the city sleeps early, their willingness to pay for a safe ride home will be high. If markets work normally, they’re guaranteed a high consumer surplus. And this will be made possible by someone, somewhere else, who stretched their budget to be able to afford an Uber ride.

Think about it!

Cross-posted at RQ

Why Breakfast is an integral part of South Indian cuisine and not in North Indian

I suppose the more perceptive of you would have noticed this – that breakfast forms an integral part of South Indian cuisine, while it is totally absent (apart from parathas) in the North. The more inquisitive of you would have asked yourselves this question, and would have perhaps asked some friends and relatives and acquaintances also. The luckier among you would have found some answers. I think I belong to this category, too. And I hereby share my theory with you.

The fundamental concept here is that South Indian food is predominantly rice-based while North Indian food is roti-based. Yes, you have the accompaniments – sambar and dry curry in the south, and dal and sabji in the north. But let us focus on the staple component here. Let us think back a few generations, when large joint families were the norm. Division of labour meant that most women would spend most of their time cooking.

Now, those of you who have cooked, or even observed someone cooking, would have noticed that the process of cooking rice is “scalable”. On the part of the cook, cooking 10 kilos of rice takes only marginally greater effort compared to cooking 1 kilo of rice. On the other hand, rotis are non-scalable. There are minor economies of scale in terms of time taken to get the stove going, but the amount of effort involved in cooking is directly proportional to the number of rotis to be made. Roti-making is thus non-scalable. Also, observe that roti-making is high-involvement. It requires the undivided attention of a cook. On the other hand, you can just set rice to boil, and go sing a song while it gets cooked.

So the funda here is that given the non-scalable process of making rotis, whenever there were large families involved, North Indian women would have to spend a large part of their time making rotis. The long and tedious process meant that women had little time left over after cooking lunch and dinner. Contrast this with the rice-eating South, where due to the scalable process, women had a lot more free time compared to their Northern counterparts.

Another thing we need to remember here is that rice is more easily digestible than wheat, and hence doesn’t “last as long”. Hence, the rice-eater will need to eat at more regular intervals as compared to the wheat-eater. The wheat-eater can easily survive on two meals a day, but this is not the case for the rice-eater. There is the need for that one extra meal.

So, people, this is why breakfast, which is an integral part of South Indian cuisine, is practically absent in the North. There was demand – rice-eating south indians couldn’t survive on two meals a day. There was also the requirement for variety, for one couldn’t eat the same thing thrice a day. And there was supply – the free time the South Indian woman had, thanks to the scalable process she adopted for making lunch and dinner. This explains why South Indians evolved such an excellent breakfast cuisine, while people in the North eat bread.