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I had a bad dream the other night. I dreamed that I was in the middle of the Sahara desert
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all alone, dressed in rags, incredibly thirsty. When the dream began, I was aware that I had
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been walking in the desert for three days now without food and water. I was on the verge
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of collapse. Just then, in the distance, I saw a Coca-Cola stand. What a miracle! Could
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there be a mirage? I ran towards the Coca-Cola stand, stumbling twice in my hurry, fumbling
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over the sand dune that came in the way. And when I got there, I saw that behind the counter,
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there was a guy who looked just like Vijay Mallya, wearing a red cap and dark glasses.
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I asked him, can I have a can of Coke, please? Sure, he said, but you have to pay for it.
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I nodded. I had a hundred bucks in my pocket. How much is it? I asked. It's ten thousand
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rupees, he said. What? I shouted at him. I didn't have so much money. How can you charge
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me so much money? Isn't that a maximum retail price? He just looked at me and laughed. No,
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there isn't, you fool, he said to me. Who told you to dream about the Sahara desert?
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We are not in India right now, so no MRP. He started laughing, and that's when I woke
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Welcome to the Scene and the Unseen, our weekly podcast on economics, politics and behavioral
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science. Please welcome your host, Amit Verma.
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Welcome to the Scene and the Unseen. I'm your host, Amit Verma, and for you, my dear viewers,
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the MRP of this show is zero. MRP, as all my Indian listeners would know, stands for
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maximum retail price. This is a price set by the manufacturer of a product, above which
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a product may not be sold. What is the intention and the scene effect of this? The scene effect
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of a maximum retail price is that consumers are not cheated into paying excessively high
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prices by unscrupulous capitalists. So that's the scene effect of MRP, and the thing to
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note here is that while the existence of an MRP is mandated by the government, the actual
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price is set by manufacturers themselves. So it's not like the price cap set by the
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government that we have discussed in previous episodes, which inevitably lead to shortages.
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But even the MRP has unintended consequences and unseen effects, and to discuss them, I've
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invited a guest on the show. Prithviraj Mukherjee teaches marketing at IIM Bangalore, and before
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he gets started on telling us about the unseen effects of MRP, there's an important social
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science funder that he'd like to talk about. Yeah, thanks Amit. So what I'd like to start
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off with is by talking about the anchoring bias. Now, some of you may have already read
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about this if you've read Nobel laureate Daniel Kahneman's book, Thinking Fast and Slow. It
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is a very powerful bias. So let me just briefly explain in layman's language how this works.
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So one of the experiments that they did is that you get say 100 people and randomly divide
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them into groups A and B. And these experiments were done in America in different contexts.
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So first let me start with a non-price context. So what these guys did was divide people into
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two groups, A and B. Group A was asked, do you believe Gandhi died at the age of 40?
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And B was asked, do you believe Gandhi died at the age of 144? Right? Now remember that
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these are American people, not that familiar with Gandhi, but they've seen pictures of
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Gandhi. They know that Gandhi was old. So group A clearly knows that Gandhi did not
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die at the age of 40. So almost all of them answer no. Unless you're really ignorant,
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you answer no. Group B knows that no human being has lived 244. So they also answer no.
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So this is known as priming. Essentially these numbers are to prime you into a certain state
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of mind. The next question they ask is, so at what age do you think Gandhi died? Now
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here's the interesting bit. Group B, who were given a high number, gave an average
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death age of Gandhi much higher than group A. Now remember that these groups were randomly
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assigned. The numbers also make no sense. Right? So what the hypothesis was essentially
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is that even nonsensical numbers can prime you to make value judgments, judgments about
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things that we assumed previously that you would be rational about or you would have
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some knowledge about. Now let's take this into a pricing context. Instead of Gandhi's
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age, imagine I show you a Coke bottle and ask you, would you pay 10 rupees for this
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Coke bottle? You're used to paying 30 rupees. So you say yes. Another group is asked, would
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you pay 100 rupees for this Coke bottle? You know that this is absolutely high. So you
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say no. And then I ask you, Coke bottle is a bad example because you have internal references
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already and I'll explain that. Imagine it's a new product, an artifact of some sort. You
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think 10 rupees is cheap, 100 rupees is too high. So in one case you say yes, in the other
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case you say no. The next question is, so what's the maximum you'll pay? Now you'll
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see that group A who was primed at 10 rupees is going to give a much lower value to that
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maximum price that they're willing to pay than the 100 rupee group. So essentially what
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the inference is that you assume that people know how to value things, but they do not.
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Now this has far reaching implications because negotiations are based on anchoring, negotiations,
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things like, you know, when, what do you say, when juries award some sort of compensation,
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you see that people ask a really high number because that's actually an attempt to anchor
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the jury into giving a higher number, et cetera. If you're bargaining on something, et cetera,
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you can see your shopkeeper intuitively knows that anchoring bias. He's going to start at
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a high number. You started at a lower number and then you start going back and forth.
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So essentially this is the idea of anchoring. Now Kahneman and Twosky showed that this can
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be done with pure random numbers. Now this was a very, very big deal. Remember that neither
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Kahneman nor Twosky were economists and their findings flew in the face of conventional
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economics and the idea of the rational man, homo economicus. And unfortunately Twosky
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died too early, but a lot of work in this line finally led to the Nobel prize that Daniel
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Kahneman got. So now related to this idea is that, is the idea of reference price. Let's
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go back to the pricing example. So if you're used to paying a certain price over a period
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of time, you kind of get used to it. And this again kind of relates back to the anchoring
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bias. And so you're happy when there's a discount and you're disproportionately unhappy when
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the price increases. So there have been studies to show that discounting marginally increases
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the demand. But if you increase over a certain reference price that the customer is used
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to, so essentially losses loom larger than gains, which is, which is actually the theory
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that got the Nobel prize, the prospect theory, which Kahneman and Twosky came up with. So
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yeah, you're not too sensitive to gains, but you're disproportionately sensitive to losses.
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Yeah. So with this basis in mind, we can start talking about what maximum retail price is.
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Give me the history of the MRP. What is the purpose behind MRP? Why is India the only
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country that has it? And what is the intention behind it? Firstly.
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Okay. So MRP means maximum retail price. Uh, as far as I know, India is the only country
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right now that has it. So there's a very nice article by Anupam Manoor in the Hindu of the
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Takshashila Institute. So MRP was introduced in 1990 as a proposed measure to safeguard
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consumers from, um, unreasonably high prices. It is not applicable to lose, uh, food grains
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or anything like that, or services is applicable to packaged goods, essentially branded goods,
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packaged goods, et cetera. So Dawood Basmati can have an MRP, but Luz Basmati cannot. Uh,
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the idea being that, uh, uh, you don't want a trader to charge unreasonably high prices,
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especially given that in many places you have what is known as a local monopoly. So even
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though there is competition, uh, in a small village, I might have a local monopoly and
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I do, I don't want you to become, to start price gouging because of that. So a Coca-Cola
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can, for example, is sold at, uh, has an MRP of 30 rupees, et cetera. The company that
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packages the good is allowed to set its MRP, but it has to print it on, uh, on the packaging
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and then, uh, it is punishable by law to charge more than MRP. The retailer cannot charge
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more than MRP. What does the anchoring bias and have to do with MRP? Okay. Uh, so the
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anchoring bias comes in. So I explained about how people are primed with numbers, right?
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Uh, so abroad, for example, let's say in the U S or France, where I was, uh, people are
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used to paying a certain price and that kind of serves as the anchor or reference price
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in the long run in India. Uh, since the price is explicitly printed on the packaging, it
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kind of serves as an anchor for you. So your willingness to pay is kind of determined by
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the anchoring bias by the MRP. So, uh, you will be very sad if I go a little above MRP.
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Uh, so you might have experienced this when you go to a shop and the guy charges you more
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than the MRP. You're typically not happy and you will be mildly happy when a discount is
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given on the MRP. So that's the relation of the anchoring bias to MRP. And what are the
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unseen effects of the MRP? The scene effects is a snow price gouging and customers know
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what to expect and they don't get exploited. What are the unseen effects? Yeah. So unseen
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effects can happen in many ways. Uh, one of them is that especially in remote areas again.
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So again, let's take the example of a Coke bottle or say ice cream. Now you need to deliver
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the goods to the shop. First of all, if you're in a remote area, the cost of that increases
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and sometimes is borne by the retailer himself. Uh, you might not have a reliable electricity
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connection which you need for refrigeration of course. So you might incur costs which
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do not make it economical for you to sell at MRP anymore. You might have to sell it
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at a price higher in which case either you do sell it at a higher price, which is often
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commonly observed, or if there is a strict enforcement of MRP, you might end up not stocking
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certain goods. So this could have effects on the retail shelves in the remote areas.
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So effect one is essentially that because there is a price ceiling, if it's not economical
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for someone to sell it within the MRP, he doesn't sell it at all. There's simply a shortage
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of at all or he breaks the law or he breaks or he breaks the law. So for example, if I
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take an ST bus and I'm near Kolhapur and I get down at a store and the cost for him of
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getting the Coke bottle there are so high that he cannot possibly sell it profitably
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at MRP. Either he's breaking the law and taking that risk or there's no Coke bottle for me
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at all. Exactly. That's exactly the point. So what the MRP is doing there is actually
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interfering with free market dynamics. So his profit maximizing price might be slightly
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higher. Now remember unlimited price gouging is not possible. If this guy sells the Coke
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bottle at a hundred or 200 rupees, nobody's going to buy it. So, but it might be economical
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for him to sell it at 35 instead of the printed MRP. And people would gladly buy it. Yes.
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And you also need to drink a Coke, et cetera. So that's, that's the trade off being made.
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The other thing is that think about a city, a crowded city area where there are hundreds
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of shops next to each other, the small Panwala, et cetera. Those guys actually benefit a lot
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because the MRP actually gives a kind of signal at what price you can charge. And this guy
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can tell the customer, look, I'm judging the MRP. I'm being fair. The MRP hadn't been
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there. There might have been a price war where all of these guys would have either killed
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each other or gone out of business. But the consumers would have benefited eventually
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from lower prices, right? Yes. So the consumers from the consumer's point of view, I suspect
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that the average price being paid by consumers is high, high now. So because of the MRP,
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because of the MRP. So you're paying prices very close to the MRP. So at best your shopkeeper
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might reduce the 30 rupee price to 28, but the MRP is kind of like a fixed price which
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prevents it from going down to 20, 15, 10, et cetera. So that each one trying to put
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the other out of business, the price war, the spiral doesn't happen. So if the MRP wasn't
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there and let's say you have a lot of soft drinks stores at a beach and if the MRP wasn't
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there, you imagine they would compete and the customer would get a good price. But here
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the MRP effectively cartelizes in terms of what is actually happening. Exactly. There
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is a third aspect. There are actually four aspects that I'd like to discuss. Aspect three
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is that you may have observed that if you go to a McDonald's subway or airport, they
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advertise soft drinks, Pepsi, Coke, et cetera. They do not put the price, but they put MRP.
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And now of course you are lulled into thinking that these guys, I'm at a posh place and I'm
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paying MRP perfectly fine. You ordered the Coke, et cetera. You'll be surprised to see
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that the same Coke bottle, which costs you 30 rupees at the Panwala store is now has
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a printed price of 60 rupees. So Coke is allowed to set different MRPs for different outlets.
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Yes. And there will be a small print which says this is only for certain outlets. Now
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there's a history to this actually. So MRP violation of course is very common and especially
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at airports. If you remember from say eight or nine years ago, you would see that MRP
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was being regularly violated. The MRP was still 30 rupees and they were selling it at
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double, et cetera. Causing much middle-class outreach. Much middle-class outrage, et cetera.
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And this was blatant violation and the double MRPs didn't exist at that time. So some tax
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officer was overcharged at Chennai airport and he got so angry that he ended up fining
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them 80 lakh rupees, the shop. And after this, of course, now it becomes unprofitable as
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I said to sell at the airport because you know, large licensing fees, et cetera happened.
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So the way to get around this was that brands decided and lobbied with the government to
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have different MRPs. One for the posh outlet and one for the common man. I find this kind
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of hypocritical in a way. So again, this is my value judgment because see, you're allowed
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to sell below MRP at any point. So if you, I have no problem if somebody says 60 rupees
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or a hundred rupees is an MRP, but why not let even the small guy have the 60 rupees
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or a hundred rupees MRP and then let the free market dynamics play out. So why should the
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guy in a remote place in Kolhapur still be forced to sell at 30 rupees when it's not
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economical for him, but the airport guy for the same reason is allowed to jack up the
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price. Absolutely. Yeah. So having MRP for different segments is kind of farcical in
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that sense. What's the effect of this that, you know, the airport has a higher MRP. Yeah.
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So I can tell you from personal experience and a few other people. So before I also used
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to see that the airport would say coke 60 rupees, which was illegal. And I would end
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up not buying. Right. Uh, recently what happened was once I went to a vending machine and not
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vending machines. Sorry. One of those, uh, outlets at the airport and it said the Pepsi
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MRP. And this was like about five years ago. I was very happy. MRP, right? Let's buy it.
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So I buy it and then I'm just 60 rupees. And I tell this guy, what the hell? And he says,
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look at the printed price. I'm charging you MRP. So, yeah. So it brings about a false
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sense of security. If I may say that you are being charged a fair price. Uh, in my case,
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I actually took a look and then realized that this is the difference, but imagine you're
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having a large meal. Let's say you're a family of four and you have four pizzas and four
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cocks, for example, and this could happen at your pizza hut, subway, et cetera. Uh,
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you see MRP and then you don't really take a look at the bill, right? You assume that
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there are taxes is that et cetera. And you don't really see that you're actually paying
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double the amount. So the guy charging 35 rupees on a 30 rupee MRP right next door to
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the McDonald's can go to, can pay a huge fine for breaking the law. While this guy here
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can fully charge you 60 bucks and the consumer doesn't even realize it because the term MRP
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is like a signal of reasonableness. He can then relax and not either that or the consumer
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himself justifies to himself that subway somehow a higher place or a better place. So it seems
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reasonable, but actually it isn't right. So we have three effects. So for effect, one
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is that they can be shortages because, uh, uh, because of the price ceiling effect too
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is that consumers often if competition was allowed to play out would get lower prices
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and therefore they are suffering. Effect three is that consumers can be lulled into a false
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sense of security because MRP is in that sense a signal for reasonableness for most of the
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middle class and they trust it implicitly. Exactly. So what happens is, so to add to
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your point, just, just go to your nearest McDonald's subway or airport the next time
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and see, see the board. You will see Pepsi MRP. You will never see Pepsi 60 rupees. Exactly.
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They will always tell you that we are selling soft drinks at MRP. The word MRP will be written.
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So yeah, so this is essentially to lull you into the false sense of something to watch
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out for, especially in days where cash is hard to come by. Exactly. Uh, what is the
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fourth unseen effect? Yeah. The fourth unseen effect again. So remember that we have discounts
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on online retail. So in places like us, um, if I tell you that there's a 40% discount
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it does not have that much information value simply because there is no published price.
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So people may say there's a 40% discount on the average price or the last price or something
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like that. But there isn't that much of information value as there is in India simply because
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an MRP is published. So you can very clearly say that I'm giving you a 40% discount on
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MRP. So one artifact could be that companies themselves are inflating the MRPs. Um, so
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I could inflate the price of a cell phone to be 20,000 rupees and then say I'm giving
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you a 50% discount on Flipkart and selling for 10,000 rupees. Of course they're still
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making profits. I hope the company is, it's a different matter that may not be. So this
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again has some peculiar implications or you can see it in garments, retail, et cetera.
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I don't know about you, but I don't buy clothes unless there's a minimum 30% discount or a
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buy one, get one free or something like that. So in marketing terminology, this is called
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deal proneness. So you become so used to deals. So your reference price is no more thousand
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rupees for a t-shirt, but it's thousand rupees minus 30%, 700 rupees. So these discounts
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on MRP are actually kind of, uh, making you deal prone and lowering your references. So
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what's wrong with being deal prone from the consumer perspective, nothing from the retailer
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perspective, uh, it erodes brand value, especially higher brands. If you see luxury brands never
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give deals, price deals at least, uh, to, uh, you, uh, once you start giving deals,
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you'll always have to give deals and there is no way up. What's the role of MRP in this?
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The role of MRP is that the deal is actually based on the MRP. So if you haven't been clever
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enough to inflate the MRP to a really high value, uh, you could end up losing. Uh, the
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second thing is, yeah, deal proneness is not good for your brand value at all. So, um,
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I don't know about other people, but you see Flipkart giving a deal every day and come
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on, it's not really a very good signal of a credible brand.
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And would it be correct to say that these wild discounts that we get, these discount
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wars that happen on the online stores would not happen if there was no MRP because the
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market would be competitive and the prices would be much lower anyway. So in percentage
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terms, you would not be giving such high discounts.
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I would tend to agree with you. Uh, of course there needs to be more validation done on
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this, but yes. So if market dynamics were allowed to play out, we might have just seen
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prices being compared instead of deals being compared. So instead of going to X with 40
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percent versus Y with 30 percent, I would go to X with 60 rupees versus Y with 70 rupees
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and do a price to price comparison again. Um, so when I was abroad, let's say for air
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tickets, for example, uh, I would look at absolute price and I still do, but here I
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see that apps, shopping apps, et cetera, they show you the percentage values rather than
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absolute. And because we are so anchored to the MRP, these deals look very juicy to us.
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They look very juicy to us. Exactly. So 10,000 rupee phone looks over 20,000 rupees looks
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much juicier than 10,000 rupees over 12,000 rupees. Right. Thanks so much. Very illuminating
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talking to you. Thank you. Thank you. My honor. So there you have it. While the MRP is a good
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intention measure meant to protect the consumer, it's unseen effect might actually be the opposite.
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It ends up harming the consumer. It is in fact my case that pretty much all interventions
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in a free market end up harming consumers. This is a theme I'll keep exploring in detail
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as the weeks go by. But for now, thank you for listening to the scene and the unseen.
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Next week on the scene and the unseen, Amit Varma talks to Shruti Raj Gopalan about Uber
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surge pricing. For more, go to scene unseen.in. If you enjoyed listening to the scene and
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the unseen, check out another great show by IVM podcasts made in India, hosted by my friend
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May Thomas, where every week she profiles up and coming independent Indian bands. Hey
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man, just help me out, man. I need some, I need some podcasts, man. I haven't had a fix
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in a week. Just need some. Don't you worry about it. I got podcasts below for you, man.
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Just go to IVMPodcast.com. You can also find us on Facebook, Twitter and Instagram. Thanks
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man. I'm going to check it out.
