International

The Land of Freely Colluding Markets

What do Angkor Wat, price discrimination and Bintang singlets have in common?  The Travelling Economists, Nicholas Ainsworth and Zach Cole, provide a unique take on backpacking through South East Asia.

The attraction of travelling through South East Asia for young people is the cost of travel; there are cheap thrills to be had close to home.  Outside of wealthy tourist hotspots like Kuta, Bali and Phuket, Thailand; all the necessary elements exist to offer cheap and friendly, backpacker travel.

But there is one hindrance to this ideal situation.  It comes in a more clandestine form than the occasional mugging, stolen credit card or lost piece of luggage.  The real trap is the lack of perfect markets for the tourist in Asia.

And it shouldn’t be so.  With so many small individual vendors, selling almost identical products and with almost no barriers to entry for other sellers, the market for most goods in Asia is very, very competitive.

But tourists cannot access these perfect markets.  Sure, a tourist can walk into the large market establishments like Ben Tanh in Hoh Chi Minh City or Chatuchak in Bangkok and buy anything on offer.  Yes, these prices may appear ‘cheap’, but tourists are still likely to pay more than a local for the said item. Why such a big difference? It’s because the tourist is willing, and able, to pay more, and the locals know, and exploit that.

It’s called price discrimination in the economics world.  When you go to the movies, there are various types of tickets.  Adult tickets are the most expensive, but if you are a student you can get a discount.  Why? Because cinemas know that students are less willing and able, to pay as much as adults for movie tickets.  For this type of price discrimination to work, there needs to be groups that are easily identifiable to the seller, so the seller can discriminate between these groups.

There is no better example of easily identifiable groups, than the local and the foreigner.  Any local can tell a foreigner from a mile away; even if you’re fluent in the local language, have a healthy tan and look well travelled.

Why not just go to the next vendor? The simple answer: collusion.  Every seller communicates with each other to keep the prices artificially high.With foreigners who are very easily identified (just taking off the Bintang/Chang/BeerLao singlet isn’t quite enough) and locals with the sole goal of extracting as many tourist dollars as possible, the game becomes very one sided.  You can barter all you like for that taxi back to your room, that singlet or dress, or even the bar of soap – but one thing remains- you want the good, the local has the good, and if you don’t pay them for it, you won’t have it.  It might be ok for the singlet or dress, but the 5am trek to the train station in a deserted country town won’t leave you with much choice but to cave in and pay the price.

We have raft of legislation in Australia protecting (though its actual results will need to be the subject of a totally different article) consumers from price fixing, price gouging, collusion and we consistently ask the Australian Competition and Consumer Commission and the Australian Securities and Investments Commission to make sure one company doesn’t get enough market share.  We’ve had more petrol price investigations than we know what to do with – but one thing is for certain: we are trying to combat collusion, albeit heavy-handedly,

But the for the Asian locals, collusion isn’t illegal, or if it is, trying to enforce laws upon the local taxi, tuk tuk, soft drink, t-shirt or hotel cartel would be administratively impossible.  Why? Corruption, family ties and the fact that the only people who get ripped off are tourists. It is the tried and tested case that the local will be able to get every taxi driver to use the metre, but the chance of a tourist getting the metre turned on is about one in a million.  And the chance of a establishing a tourist consumer protection body to lobby foreign South East Asian governments to protect tourists from collusion is impossible.  What is even more ludicrous is thinking that these governments would listen to such a body.

Price discrimination can go further than differentiating between groups. Once you are identified as belonging to the ‘foreigner’ group, you will then undergo an intensive assessment to determine just how oblivious or wealthy you are.  Demand-based pricing is an effective method but is often met with rejection in the western world for it seems as though the consumer is being exploited with the need for a product.  Imagine if the price you paid for a good was dependent solely upon what a vendor ‘thought’ you could pay.  This happens everyone in South East Asia.  Wear your expensive Ralph Lauren polo gear and jump off the AC tourist bus with your Evian water, and expect to pay more than a backpacker rolling in some Ali Baba pants humming Bob Marley.

When buying food in Cambodia there is often a pause between asking the price and receiving an answer.  The hawker looks you up, then down, might even get out their calculator and do some sums (it actually happens) and assesses your ability and willingness to pay.

These concepts are not limited to ethnic Asians. The Europeans who run the Asian dive schools also created a diving cartel. These dive schools fix prices in the most popular locations in Indonesia (Gili Trawangan) and Thailand (Ko Tao). In Gili Trawangan they even have an OPEC style system of price maintenance with monthly meetings! Dives are now fixed at US$38 and compliance enforced by word of mouth since customers often brag when they find a cheaper dive.

If you’re ever in Gili Trawangan be sure to go to a dive school and tell them you just had a great dive for USD$20 at the dive shop down the street, repeat at the next dive school. This will create a bit a mini mayhem in the Indonesian dive cartel!

It would be wrong to make the conclusion that the locals create an artificial price floor which is ‘expensive.’ Relatively, it is compared to local prices, but in absolute terms the price floor created for foreigners is relatively inexpensive.  Foreigners can only argue until they get extremely hungry, desperately need a room to sleep or start looking like the Hunchback from lugging that pack around all day.  And when the argument is over two dollars, sometime tiredness gets the better of you.

But if you look at prices in Asia on a relative basis, compared to the local average GDP or income, they are extortionately expensive.  We often find that GDP/Capita is the best possible single measuring tool for assessing the cost of travel within a country. This should be true provided you were living like a local; double it if you want to live twice as nice as they do for the time you spend there.

So the deviation between the cost of living as a tourist and the GDP/Capita is a reflection of either your unusual activities/drinking habits, or the extent of inflated tourist prices – the cost of being foreign, or the cost of the being white.

A single day pass to visit the Temples of Angkor in Siem Reap, Cambodia, costs USD$20. GDP/Capita in Cambodia for 2010 was estimated at USD$783. Cambodians enter Angkor for free.  USD$20 is 2.55% of a Cambodian’s annual income; or 9.3 days work.  Compared to Australia’s AUD$55,946 GDP/Capita that is equivalent to charging foreigners AUD$1425.47 to enter Australia’s best tourist attraction for one day.

All this price fixing begs the question why we constantly return to South East Asia. It is because although it is not necessarily cheap to live on a tourist budget compared to the budget of the locals, it is relatively cheaper than living in Australia or another western nation.  So next time you’re overseas try to see if you can last the entire trip by interpreting the prices of goods relative to the price paid by the locals, and never by converting a price back into Australian dollars.  Why? Because converting back to AUD naturally relates to an Australian cost of living.

TOP 10 TIPS FOR PAYING LOCAL PRICES:

  1. Avoid making purchases when in large groups – this might portray an increase in purchasing power
  2. DON’T wear jewellery
  3. Dress plainly and casually
  4. Get a local haircut
  5. Learn the local phrases for requesting goods, services and their prices
  6. Learn how to count in the local language
  7. Carry a smaller backpack
  8. Act semi disinterested if the seller is overly interested to exploit the ‘willingness to pay’ principle
  9. Smile and speak calmly and softly
  10. Respect local customs (footwear off when entering most shops)

Selling land – Thai Style.  This would probably be classified as misleading and deceptive advertising in Australia.

 

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One thought on “The Land of Freely Colluding Markets

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