Tuesday, 18 August 2015

Inviting Participants To A Fair Marketplace

A theory of a ‘Fair Marketplace’ or a ‘Fair Price’ may be a good starting point for the creation of a Fair Marketplace. But is it a necessary condition? Let’s explore.

Let us consider the starting point as the presence of connected market participants (providers and consumers of goods and services) who are willing to act in this direction and who don’t distrust each other. There may or may not be a reason to trust, but it is sufficient if there is no reason to distrust. Let us see if these ingredients are sufficient to get started. There may not be a shared theory, philosophy, or ideology. You may not understand economics at all. You may not know or agree that the prevailing market practices are exploitative and unfair. If you say, “I am committing to participate in a marketplace, which is based on fair (non-exploitative) prices, not co-related with or based on the prices determined by the existing market forces.”, we’re on.

The first step is to create a laundry list of people with relevant details. What kind of people? Owners of businesses, self-employed professionals or freelance service providers should be able to participate on the supply side. On the demand side, everyone, who is a consumer, should be able to participate. We’ve left out salaried individuals from the supply side because they may not be in a position to influence fairness in the operations of their employers.

One may take a stand that I want to be fair, but I will act only when we have a fool-proof theory and everyone all others are also fair. There is also another way to start off. We trust each other and start off. Start-off means we begin economic exchange at prices, which are fair and in no way compared with the price in the existing marketplace. Let us simulate price determination and further activity leading to an economic exchange.

Who determines the price? The provider does. We have trusted his commitment to be fair. Can there be more providers of the same service? Yes, there can be. Should there be a guideline for the provider to arrive at the price? There may be a guideline, which says that ‘The occupation/profession of the provider is expected to enable the provider to meet his/her needs and those dependent on him/her.’

The above guideline leads us to a very interesting scenario. There are two service providers, one a bachelor with no dependents and leading a very minimalistic life and another, a family person with many dependents, who require medical attention. Both provide same service. The price that both arrive at may be vastly different. Nonetheless, both follow the guideline. Can there be a marketplace, where different prices exist for the same product/service?

The answer to the above question is also interesting. We agree that the occupation/profession of the provider should enable him to fulfil his/needs and we also agree that we trust his integrity in arriving at the prices. Since people have different needs, the prices for the same product or service will be different and has to be accepted. By not accepting this difference, we will end up pushing the prices to those determined by demand and supply. This is a completely different paradigm. It deserves some thought.

Let’s say the new paradigm is acceptable. In another scenario, the service provider is passionate about photography or scuba diving or car racing. In order to meet the expenses of his passion, he needs to jack-up the price of his service. Now is the difference in pricing acceptable?

Before we seek an answer to the question, let us examine the question itself. It is quite obvious that the pricing in such a situation is not acceptable and is also unfair to the consumer. But that is not the point. The point to be noted is that such questions arise because we think of such a possibility. We think of such possibilities because we’re conditioned to distrust. When we’ve trusted the provider’s integrity to arrive at the price, we must also trust that he/she understands that loading the expense of an expensive passion/hobby is unfair on the consumer. Therefore, the question is redundant.

We’ve moved one more step. We’ve accepted the new paradigm that price of a product/service may differ based on the need of the service provider. We’ve also ruled out the possibility that the provider will indulge in practices to hike prices, which are clearly unfair. That leaves us with those scenarios, where there is a marginal difference of opinion between the provider and the consumer as to ‘what is fair’. Such differences can be and should be sorted out bilaterally.

One last point to be included in the new paradigm (referred to earlier). As the consumer takes the responsibility of accepting a price, which fulfills the needs of the provider, the producer also must accept the responsibility of fulfilling that need of the consumer, which his product is meant to satisfy. This cross acceptance of responsibility will go a long way in determining a fair price.

Guess this may be sufficient food for thought for one blog post. Let me continue in the next post.

Saturday, 15 August 2015

Economic Equations of a Fair Market Place

Problem Statement: Coconut prices dipped sharply sometime last month owing, perhaps to over supply or lack of demand. Farmers suffered because they could not recover the costs. 

Understanding, Analysing and Solving the Problem: 

  1. The proceeds from coconut sales were supposed to be sufficient to meet the livelihood expenses of the farmer in addition to covering the direct and indirect costs of growing the coconuts. At this stage, let us assume that the price paid for growing the coconuts (labour, etc) are fair. 
  2. Let us focus on two assumptions of the problem. First, that the buyer is unwilling to pay a price higher than the one determined by the market. Second, that the seller has an understanding of what is fair price.
  3. Let us begin with the second assumption. Is the seller equipped to determine the fair price, without reference to the previous market price? If we assume that there is a buyer who is willing to pay a price, which is fair, will he be able to calculate the fair price? Will he agree that any price above this price is unfair to the buyer? Will the buyer trust him and agree with his calculation? 
  4. If the dialogue is between the seller and the buyer, without any intermediary, it seems very much possible that all the above questions get a 'yes' in response.
  5. Thus the two parties can arrive at a Market Price, which is acceptable as fair to both parties. 
  6. Now, let us get the aspect of demand and supply. The seller has arrived at the unit price of coconut assuming that all his stock will be sold. But if the supply is more than demand, the seller is unable to meet his total sale proceeds requirement. He then needs to innovate to add value and sell the value added product or sell it to someone who can add value or preserve it. This transaction also has to happen at the same fair price. Is that difficult? If no, great. In most commodities, it should not be difficult. Some amount of processing or preservation is possible. But if it is indeed not possible to add value or preserve, both the buyer and the seller should bear the brunt and reduce the production of coconut next year and replace it with something else.
  7. If the demand is more, the buyer has to find an alternative to coconut (or consume less) and urge the seller to increase production next year by replacing something else with coconut. 
Appears to simplistic, isn't it? I agree it does appear simplistic. But that is not the point. The point to be noted is that if there is sufficient trust between the buyer and the seller and both are committed to being fair, a solution is possible. Even a complex problem can be solved. It may take more time or intelligence, but it is possible to arrive at a fair price. 

If you think you are a fair buyer and a fair seller, let me know. Let us see if we have sufficient number of people to create a fair marketplace!