31 May 2016 18:56 IST

How companies and government exploit consumers

Kempegowda International Airport, Bengaluru

Firms and government strive hard to create anti-competitive environments that hurt consumers

The textbook definition of a transaction in a free market is one in which both parties are equally satisfied. The buyer is happy to buy a product at a price the seller demands, and the seller is happy with the margin made on the sale.

The underpinnings of any sale, therefore, are the buyer’s perceived notions of obtaining “value”. If the buyer sees no value from a transaction, he can (and most often does) walk away.

Except that in many modern circumstances, companies, aided by the government, strive hard through careful design, to create an anti-competitive environment that benefits everyone — everyone, but the consumer.

Airport concessions

Consider airport concession stands. Just about everything about them is anti-consumer.

Travellers pay sky high prices for limited selections because they are locked in a building with nowhere to go. Attempting to shop at another location is not an option because concession contracts are designed to eliminate competition. On the rare occasion that competition is allowed, price — or more importantly, value — is likely to be deceivingly identical.

I am a confessed Diet Coke drinker and find Pepsi intolerable. Until 9/11, I could exercise complete freedom of my choice and carry in my cabin bag, an ice cold Diet Coke aboard. After 9/11, however, governments began to impose restrictions that prohibited people from carrying liquids in their bags through airport security.

This presented an immediate problem — it meant that I had to buy my Diet Coke at an airport vending machine, after passing through security and at prices that were at least four times that on the street!

This was just one problem. There was another, bigger issue. At many airports around the world, I couldn’t find a Coke vending machine at all. Instead, I only found the alternative that I despised — Pepsi machines. This was because the airport had an exclusive deal with Pepsi in an anti-competitive behaviour that smacked of collusion.

In the binary market that we have for soft drinks — Coke or Pepsi — I concede Pepsi devotees would be legitimately outraged at airports with an exclusive Coke deal.

Solving the problem

To get to the bottom of the situation, I wrote, in 2010, to the management of Dallas Fort Worth International airport, arguing that as the airport was a public asset paid for by taxes from the travelling public and operating airlines, there is an expectation that public entities do not restrict travellers’ choices and force them to buy products from a single company.

The airport promptly got back to me but the message was unrelenting in its defence. “DFW Airport is a non-profit airport. Any revenue generated by concessions and other non-airline services offsets the costs the airlines pay for terminal rents and landing fees (airline operating costs), thereby not passing on certain costs to the travelling public through higher airline ticket fees.”

This was such a dishonest response because it essentially said the airport didn’t particularly like what it was doing, but did so only for us, members of the travelling public, so that we didn’t have to pay even more in higher ticket fees.

Also, the administration was hiding under the airport’s “non-profit” designation, which doesn’t mean that the airport is not motivated by the pursuit of money. It simply means that the airport will try to earn as much money as it can, but rather than distributing its surplus income to the organisation’s shareholders as profit or dividends, it uses it to further achieve its purpose or mission — of being a taxpayer funded airport!

Behind the scenes

This becomes evident if one were to go behind the scenes. In November 2013, Melissa Scovronski, an official of the Airports Council International, addressed airport operators at the Minneapolis-St. Paul International Airport (MSP).

The topic was ‘The Keys to a Successful Airport Concessions Marketing Programme’ and the speaker gloated that “Revenue from concessions has become more important to airports in recent years and at MSP, 46 per cent of our operating revenue comes from non-airline sources.”

So there it was! The airport’s motives were, after all, driven by money. And they were not only engaging in collusion but were denying unsuspecting members of the travelling public a choice in both, product selection and price. In India, airports in Delhi, Mumbai and Bangalore are run by private companies, so the profit motive is clear. Prices at these airports are exorbitant. Airports in cities like Chennai and Kolkata are still run by the Ministry of Civil Aviation.

The helmet rule

There are other examples when private companies have teamed up with governments, who then pass laws that directly benefit both. When the city of Bengaluru recently passed a rule that pillion riders should also wear helmets, it resulted in an outcry among residents.

In a region where the top commute speed might crawl to 10 km/hour during peak hours, where was the need to mandate helmets for both riders? What about a lone motorcycle rider who finds a friend at a bus stop and wants to offer him a ride? Should he carry a spare helmet with him all times? Is there space on a modern two-wheeler to store two helmets?

The government knew that policy decisions made without performing a cost-benefit analysis could still be justified, if they are pushed under the umbrella of safety. And overnight, this draconian measure had the authority of Law. But the real beneficiaries were the helmet manufacturers, who you can be sure, contributed crores to the political class, because with the stroke of a pen, their sales in a fast growing city literally doubled.

It is a sad fact that consumers are constrained to act, often against their will, to buy products or services at higher prices. Such marketing strategies run counter to the spirit of free enterprise, free markets and a laissez faire economy.

As long as there are powerful government and quasi-government agencies that have been granted monopoly power, we can be sure that consumers will continue to be exploited.

This is an unfortunate truth around the world.