An Interlude: Musing over Supply, Demand and Delhi Auto-rickshaws

By Babak Moussavi

This post might seem a little out-of-character. That may cause disappointment or optimism depending on your opinion, but I’ve had a bit of a Freakonomics moment in the past few days, and so I hope this random thought will interest you, dear reader.

"50 Rupees. No, actually 100."

I’ve just moved to Delhi for a few months (to do some exciting stuff that I shall write all about on these pages in April) and have been cut off from internet access which makes me feel like I’m in the ideal Socratic state of being very aware that I know nothing at all. And that doesn’t just refer to being cut off from the world’s news. It also refers to India – a country, I can admit, I have never held an especially strong interest in, beyond reading the passing article about it in the Economist. So in the past few weeks, I’ve been reading everything I can get my hands on, in what might seem like a crash course. Of course, before I got here, I didn’t realise that the term ‘crash course’ might come very close to being literal.

Auto-rickshaws, or cabbies, or tuk-tuks, are a ubiquitous presence on the Delhi roads, nipping in and out of traffic, honking more than breaking, and generally appearing as if they’re going to fall apart at any moment. So of course, they are my main form of transport – when in Rome and all that.

Each auto-rickshaw has a meter, but they never work. Or at least, the driver never turns them on, or never resets them. So the price for a journey is always negotiated at the beginning. The drivers are experience folk, being able to spot a bewildered foreigner from a mile off, and so at first I was being charged around twice as much as I now am (in absolute terms, this still doesn’t make it much by British transport’s standards – thank you for the above-inflation price hike Network Rail!). Eventually, one learns how to approach the subject of price, and learns how to haggle properly. It’s a skill as much as driving through the Delhi traffic is – though I know which one is more impressive.

This isn’t a travel blog, and I don’t intend on writing a post of that sort. So how does this relate to social justice? Well, auto-rickshaws lay bare market economics in a developing economy. In my short experiences with these auto-rickshaw drivers, I’ve noticed the very clear effects of supply and demand, price discrimination and imperfect information.

On Sunday, I went from the amazingly-named Defence Colony Market to Haus Kaus Village after lunch. A number of auto-rickshaws were waiting there, but no-one was travelling at that time. So I had room to negotiate. 30 rupees for the whole journey: a bargain I thought, based on my previous experiences. As that point represented my willingness to pay, so it constituted his willingness to supply. Equilibrium is a tough thing to find, but through negotiation a mutually agreeable price was found between buyer and seller.

Hauz Khas is a popular, up-and-coming area, and much busier than Defence Colony. On my way back, therefore, there were very few auto-rickshaws, as they were being snapped up immediately upon arrival. When I finally hailed one, I asked him to take me back home – a journey half the distance of the original – to which he replied, 70 rupees! To my further surprise, not a word budged him. I shrugged and went for the nuclear option: I walked away. By the time I’d turned, the next group had got in and he was whizzing away. I spent the next ten minutes in ignominy, waiting for the next auto-rickshaw to appear. Waiting for an auto-rickshaw was a hitherto unthinkable event. And yet it was happening. And as it was happening, the amount I was willing to pay was rising ever further. So by the time an auto-rickshaw did come, I paid a lofty 70 rupees without any fuss. Equilibrium is often hard to find. But sometimes it’s very easy.

My Indian friends warned me about the levy I would have to pay for simply not being Indian. Not only do drivers know how to negotiate hard. They also know that travellers generally have more cash, and don’t know the bus routes as well (or at all), or that they might not be brave enough to face the crush of the metro (more on that incredible experience, and what it says about Indian society, another time).

This is price discrimination, where the seller knows that different groups have different levels at which they are willing to pay. One finds it in all different markets (note for example how on some text books it says “Not for sale in USA”, where it costs twice as much), but here it is clear. It reflects an imbalance in the global market for various goods. But given the inequality that exists in the world, at least it protects the poor from paying the rich world’s prices. The concept of ‘willingness to pay’ must be a localised average – with global inequality, trying to charge a global average would, at a minimum, lead to grotesque inefficiency.

Finally, imperfect information – a quintessential, yet largely inescapable, market failure – is apparent in the auto-rickshaw example. While it may have been possible for me to negotiate a mutually agreeable price with one driver, I have no idea whether I am still being ripped off or not. Were I to be able to assess the offer of all the auto-rickshaw drivers in the market (assuming they’re not all one big cartel) I would know the minimum I could get away with paying. While this information is lacking, the market is opaque, and the consumer is likely to be charged above market price.

But in a country with such poverty, when debating over the equivalent of a few pennies, in many ways I feel better about paying more.

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