In this article, I would try to bring forth certain issues in the socioeconomic sphere of a developing country like India, picking up from many experiences around me as I live in Kolkata. It is quite likely that many other developing countries would exhibit similar trends as the hyper digital era has unfolded around us, particularly in the last 10-15 years. The initial gains for the consumers in terms of lower prices, wider choices and greater efficiency from home delivery of products has slowly given way to a myriad set of problems that confront the consumer as she tries to use the various digital options to make choices from an array of goods and services.
The basic proposition is that consumer welfare is being given short shrift in today’s digital world. The consumers are paying much higher prices across platforms (though they were initially attracted to these platforms by deep discounts) and also obtaining poor quality. Most of the key platform businesses have evolved into duopoly or oligopoly markets, particularly for services. Cartel behaviour is evident, though covertly.
This lack of ethical pricing, for example, sees surge fares from ridehailing apps even in easy hours and leads to unintended consequences. Dynamic pricing should respond to demand-supply changes, and not keep prices at a permanently higher plane due to a duopoly. This has resulted in local cabbies hiking prices substantially all through the day, not only during busy hours. The outcome of this is that while car owners are not hit since they can reach their destinations, the middle-class people, who don’t own a car, are hit badly. They end up paying unjustified fares or have to shift to an overburdened public transport system, which is particularly difficult for the infirm and elderly.
As dynamic pricing is driven by algorithms, prices change as we go back to the transaction (confirming our keenness to go ahead), for example to buy air tickets on chosen dates to go on a holiday. This algorithmic pricing distorts the ‘signal’ mechanism that prices offer in any competitive market. Even if a consumer goes to a physical store and selects an item like footwear which is not easy to buy online due to fitment issues, she does not get the right size as the seller is deliberately running a tight inventory. The consumer is assured that the right shoe will be delivered to her at home once she makes the payment. She finds, to her chagrin, that a shoe from the aged inventory is delivered to her, which tears in less than three months.
A similar saga is repeated with food delivery apps, where in many cases, poor quality food from ‘cloud kitchens’ is sent to consumers. These newbies have no reputation to defend and the only way to judge their credibility is by looking at online reviews, which may also be manipulated a fair bit.
There are also alarming situations in the digital BFSI/fintech space.
There has been a significant rise in speculative behaviour due to ease of online stock trading – the DIY policies distort price signal mechanism even more, as many rookies keep trying their luck lured by easy money, without really taking to the learning that’s needed to participate in the financial markets. There are instances of retail investors trading in the forex futures market with no idea about forex issues. The CEO of India’s largest online retail brokerage has recently revealed (looking at his own client’s data) that only 1 per cent of stock traders on his platform earn returns in excess of safe bank term deposits.
The digital world pushes the DIY model – the search engine throws up a variety of answers for all possible queries. Most consumers are not able to separate the grain from the chaff and are misled easily. The DIY model in buying any form of general Insurance does not work very well since the buyers lack knowledge and also lack the patience to read the fine print. Similarly, many fintech firms that offer home loans or mortgages have not clearly explained to the borrower the impact of rising interest rates on floating rate loans. Again, the consumers are left in the lurch by the recent surge in interest rates and face the risk of losing their homes.
Another strange anomaly is the transaction charge imposed by various banks/service providers for digital payments. The costs are actually lower and there’s no reason to ask the consumer to pay more, as she goes digital. Hopefully, CBDC will ensure costless digital payments, replacing paper currency.
The likely objective of the Edtech crackdown in China in mid-2021 was to keep education affordable to the masses and not create further inequalities. Spending on education has a high share in the consumption basket of a typical middle-class family in the large populations of China and India. The parents go to extremes to fund ‘quality education’ for their children, now mostly through Edtech. The potential returns can’t justify these investments and many may remain indebted for life.
The plethora of consequences of the hyper digital world around us, as explained above, also lead to some key implications:
� Job losses in local grocery stores due to discounting by large online retailers who have raised easy money from PE/VC – unfair competition from firms with deep pockets. It’s going to be tough for such persons to seek new employment, given their lack of formal education.
� Equity market volatility is exceptional with various algorithms triggering short term swings.
� General consumers are not adept at decision making under uncertainty, volatility – the prices of movie tickets, furniture or airline tickets change even as one is taking the buying decision.
� The savings pool in a growing economy is set to reduce as consumer surplus is low due to high inflation and uncertain incomes for the vulnerable sections, courtesy the K-shaped recovery.
� The Digital way of life has led to seller consolidation in the markets of good and services, leading to platform businesses ending up being a duopoly or oligopoly. This may lead to potential irreversible inflation in the system.
� Lack of vigilant regulators – they are tough to find, also there is a lack of political will to enforce rules.
� No physical contact between buyers and sellers in the digital world kills the conscience of sellers, who try to usurp the consumer surplus at the slightest pretext.
� Social distress is on the rise due to job and income losses, poor matching of ability and activity. The digital OTT platforms are creating choice problems in small families and end up distancing family members pursuing their own individual entertainment.
� Consumers don’t feel the pinch of spending hard earned money – credit card debts are going up as also unsecured borrowing at high rates from fintech platforms – predatory lending.
� It is almost impossible to get a sense of actual price elasticity of demand with prices changing so fast, driven by algorithms. We are slowly losing the important ‘signal’ that prices provide.
The idea of flagging the above issues is to raise consumer awareness and to coax freer play of competitive forces in the markets. Ethical pricing by online platforms would surely improve consumer welfare and increase both producer and consumer surplus. This should, in turn, control inflation and raise the savings rate in the economy, setting in motion a virtuous cycle of higher savings-investment led growth process. Social welfare would also improve as inequalities are evened out and make all of us better off.
(The writer is an independent analyst, who has 27 years’ experience of understanding the nuances of financial markets.)