Wednesday, April 14, 2010

IPL Tickets & Price Discrimination

An office discussion on the availability of tickets for the IPL final (which are already sold out) started this particular train of thought.

There is a concept known as price discrimination in economics. Roughly it means that people end up buying identical goods or services at different prices from the same provider, which may happen due to a variety of reasons.

We witness price discrimination in various forms and various markets. Different consumers attach different values to the same or similar products or services. Thus, different people are willing to pay different prices for a product / service which costs the same. Thus, if a seller wishes to maximise her profits, she should sell the product / service to each customer at the price which the customer wants to pay. However, in a perfect market, this will not happen and the goods or services get transacted at the market clearing price (where supply meets demand). The difference between what the consumer is willing to pay and what she ends up paying (if its less) is called consumer surplus.

However, under certain conditions, sellers may be able to practice price discrimination i.e. charging different prices for exactly the same product / service. Usually such price discrimination can arises and be sustained much more easily in a market with one / few players where the goods or services are non-transferable and non-replicable. It arises much more frequently in services rather than goods markets because services are far likelier to be non-transferable and non-replicable.

The best everyday example of such price discrimination is air tickets. An air ticket represents the right to travel from one place to another on a particular date and at a particular time. It meets all the requirements stated above:

1) The experience and process of travelling from a particular place to another on a particular time and date is non-replicable

2) Once the ticket is bought in someone's name and assuming suitable measures are in place to prevent someone else from travelling using that ticket, it becomes non-transferable

3) The number of players is few

4) Information about pricing from the cost side is relatively restricted. You don't know what the airline is looking at when it's setting the price for its tickets. Hence you cannot really negotiate with it. You only know how much the journey is worth to you and hence how much (upto a certain maximum) you would be willing to pay for it.

5) The value attached by different people for the same journey will be different.

I have been wondering whether there was a case for the IPL organisers to do something similar with the pricing for IPL tickets.

The current pricing incorporates some amount of price discrimination, which is common to almost any live performance anywhere i.e. differential pricing based on the seating arrangements. So you will have your common stands (by which I mean those contiguous blocks of concrete), stands with chairs, executive lounges, closed AC boxes, pavilion stands etc

Note that here the difference in prices usually does not correspond to the difference in costs. In certain categories e.g. stands with chairs and common stands, there may not be any difference in the running costs at all. Still the prices will be substantially different.

Going a step further, perhaps the IPL guys could have employed price discrimination by keeping the price within a particular category variable. A simple numerical example may make it clearer:

Let us say they have 10,000 seats to offer. Right now they have priced each ticket at Rs 1000. Assuming the match had a full house, they earned 10,000 * 1000. Note that here each of those 10,000 people who bought tickets was willing to pay a minimum of  Rs 1000 to watch the match.

Now lets say they introduce a jump of Rs 100 in the price for every 10% of tickets booked.
So the first 1000 tickets get sold at Rs 1000
The next 1000 at 1100
The next 1000 at 1200

And so on. They will then earn an average of 1450 per ticket sold i.e. 1450 * 10,000

Of course, this is an oversimplification. The pricing algorithm will need to be much more robust. But the basic point remains that it could have been employed.

The most important requirement here is that there should be a sufficient number of buyers at the highest prices also. So it may end up as a tapering structure with less buyers at every price level as it goes higher.

They would have had to work really hard to ensure that they get the demand curve right.

Further, in case of matches with high demand, they would have pocketed the profits which black marketeers would otherwise earn! Funnily enough, when demand is sufficiently skewed, black marketeers ensure higher economic efficiency by pocketing the consumer surplus, which would otherwise be lost!

Lots of caveats / restrictions / difficulties in this:

1) Numbers. An average plan carries 200 odd passengers. Here the number of people for each match is in thousands. However at the end of the day, its only computers doing the job so shouldn't really matter. And even in case of airlines with 30-40 flights a day, each such airlines is doing this for 6000-8000 seats daily and around 2 lakh monthly! So it may not be that bad really.

2) Regulatory restrictions - I am frankly not aware whether there are any laws or restrictions which prevent this.

3) Basic consumer perceptions - Discriminatory pricing is accepted by the public in airline tickets. I am not sure how they would perceive it for cricket matches.

4) Non-transferability - This is arguably the most important point. If the tickets are transferable then arbitrage is possible. Lets say I buy a ticket at 1000. Now the IPL website is selling tickets at 1100. If the tickets are transferable, I can sell it to someone else at 1099 and he would still buy it from me. However eventually, with enough genuine demand (i.e. people want to see the matches and hence do not sell tickets to make profits) and the right pricing, such resale may eventually get over and the fresh set of people would then need to buy from the IPL website itself.

They could have at least experimented with price discrimination in a smaller way.

A simple way to do this, in my opinion, would have been to do a Tatkal kinda thing - opening bookings for a limited number of seats say one day before the match. Price discrimination would be more acceptable and easier to implement in such a situation.

Comments and criticism most welcome.

Monday, April 12, 2010

Grecian Gyrations

At last, a bailout (albeit one with a suspect emergency cord and a few holes in the lining):

Those wondering what the fuss is all about can take a look here:

The last part of this saga is that on Friday, Fitch downgraded Greece to a BBB- rating from a BBB+ (which is the last investment grade rating) with a negative outlook.

Its been an interesting experience for people like me, for whom "BB" till a few years back referred to an obscure soap brand whose ads were broadcast on All India Radio.

Within the daily ups and downs of the financial markets, the Euro Zone stands out as a very absorbing and challenging case study in itself. A union which would have seemed almost impossible at one point of time, hailed for giving the first real competitor to the US dollar, bringing prosperity to Europe and boosting European & World trade. Or did it really? Did it instead end up fuelling a vicious cycle of excessive leverage (debt) in the southern peripheral economies which lost no time in using the drastically reduced borrowing costs to their advantage in building an unsustainable growth cycle of consumption and housing booms?

Unfortunately, one thing I have learnt in this field is that skeletons may be shoved into cupboards, but they have an unfortunate propensity to smell and tumble out with alarming alacrity, sooner or later. Greece is no exception.

This tiny nation of a few million people has become the focal point and unwilling poster boy for the excesses of a system which was in all probability not the wisest of choices in the first place. Of course, its much easier to be wiser after the event has occurred.

A few weeks back, George Soros wrote an interesting article in the Financial Times:

As he wrote: "The euro was a unique and unusual construction whose viability is now being tested. The construction is patently flawed. A fully fledged currency requires both a central bank and a Treasury. The Treasury need not be used to tax citizens on an everyday basis but it needs to be available in times of crisis. When the financial system is in danger of collapsing, the central bank can provide liquidity, but only a Treasury can deal with problems of solvency."

Or as Joaquim Voth of the Barcelona GSE has written on his blog: "If history teaches you something, it's that countries will stick to a silly monetary standard for way too long, especially if it's seen as the ultimately proof of adulthood in terms of currency."

An obvious thing, but as someone has mentioned earlier, the world is full of obvious things which no one by any chance observes. The discussion on this can go on and on.

So, quo vadis, Euro? Remains to be seen, though the answer seems to be down for the time being.

And as for Greece? Heck, whats a sovereign here or a sovereign there?

Sunday, April 11, 2010

The CFA - A Case For Hierarchical Certification?

A chat with a friend who is (somewhat dispassionately) preparing for his Level 3 CFA examination prompted this question in my mind.

A few lines from Wikipedia on the CFA designation: Chartered Financial Analyst (CFA) is an international professional designation offered by the American CFA Institute (formerly known as AIMR) to financial analysts who complete a series of three examinations. To become a CFA Charterholder candidates must pass each of three six-hour exams, possess a bachelor's degree (or equivalent, as assessed by CFA institute) and have 48 months of work experience in an investment decision-making position. CFA charterholders are also obligated to adhere to a strict Code of Ethics and Standards governing their professional conduct

Having seen many friends prepare for the examinations (and my own half-hearted attempt) I know for sure that the course coverage and subsequent examinations are tough and rigorous. This is the oldest designation of its kind and is well-respected. (The Wikipedia CFA link also has a list of the recognitions that this designation possesses)

However, having worked for two years now in a "finance" role, I am not sure of how much of a value add the CFA is. The reason is that it is simply not intended for everybody who wishes to be associated with a finance role. And there lies the tragedy, in India at least. We tend to have a penchant for degrees and qualifications. Any qualification seen as sufficiently prestigious is coveted (in fact, one reason for the mushrooming of MBAs, but more on that some other time)

There is no doubt that the CFA is A solid qualification. But whether it is THE solid qualification one needs is something that has to be carefully evaluated.

A mere glance at the Body of Knowledge tells us how focused a course this is:

Another look at the exam area topic weights shows a marked progression from breadth across areas of finance to depth in studying asset classes and portfolio management:

It is totally intended for people who are looking for careers in investment research / management / banking & advisory. This is a very specific area of finance. Finance as a field is much broader. Consider:

- Commercial Banking
- Insurance
- Corporate Finance (borrowings, cash management)
- Domain Experts in Consulting / IT companies

Would CFA make a difference for people  who are working in the above sectors? My sense is - not much unless they want to shift to the field of investments. Of course, one can argue at the end of the day that one will learn something BUT theres a huge cost - the programme requires intensive preparation and is not easy. Will they be able to reap benefits which justify those costs? Probably not. And yet, directly or indirectly, I hear of plenty of people preparing for it without having a clear idea of where it will take them.

In fact, I have often felt that the number of people who want to take the exams is actually higher. The 3 year period and the 4 years of work experience actually acts as a deterrent.

For the CFA institute, here lies a really good opportunity. If they can correctly gauge the latent demand in India and elsewhere for a good general finance degree which has international recognition and brand value, I am sure it will blow them away! What they can do is to offer the first two levels of the CFA charter as separate designations in their own right. This will ensure that the "CFA" designation brand doesn't get diluted
and at the same time there is enough of a delineation to satisfy the needs of all market segments.

By splitting the designations into a hierarchy, the CFA Institute will end up doing somewhat of a differentiation in segmentation rather than a one-size fits all approach. (I am sure there's a marketing term for what I am saying - can one of the marketing studs out there help me out?)There are examples of this in other fields. The one that comes to mind right now is the Cisco series of certifications in the field of computer networks. Those interested can check out:

Of course, such complexity may not be needed in case of the CFA.

One possible scheme of things could be:

The Chartered Financial Manager designation for people who have say 1-2 years of work experience and clear the CFA Level 1 examination. It would be targeted at and useful for all those looking at a designation which gives them a broad introduction to the field of Finance. This could actually act as a good competitor to the MBA (Finance) degree since it would be faster and hold its own in terms of brand value. It will be a good option for people looking for a more focused entry into financial management, as opposed to management in general.

The Chartered Financial Market Analyst designation for people who clear CFA Levels 1 & 2 and have say 2-3 years of work experience. It would be useful for all those looking at a designation connected with Financial Markets.

And finally, the CFA designation.

Done this way, more and more people will have an incentive to take up the CFA since they have an incentive as the effort and preparation for one examination is not wasted - they get some bang for the buck in the form of a separate recognition. No doubt one may argue that the difference is largely psychological - at the end of the day, a person can always mention in his / her CV that he / she cleared CFA Level 1. However, if you place yourself in the shoes of a prospective CFA candidate, this mere difference in terminology could prove to be a clever marketing tool which changes the perceptions of people about the programme drastically. The CFA institute will be able to attract a much wider base of candidates.

Are Mr John Rogers and the rest listening?