BackWhy consumers shouldn’t officially reward employees
It could set a precedent for price distortion in markets where rivalry is an inadequate regulator
PremiumThe names of Social, 145, Bora Bora, Bar Stock Exchange and their like may be familiar to readers. These are big-city pubs frequented by youngsters looking for a good time with liquor, food and friends. One may run a bill of about ₹2,000 per head, going by menu prices. Once the bill arrives, it usually has a 10% service charge added on and also GST on ₹2,200. The pub would argue that the service charge was mentioned on the menu card, though dim lighting may have made the fine print hard to see. The ministry of consumer affairs has an issue with this.
The ministry rightly says that a restaurant should be transparent and can hike its menu rates, but must keep its service charge out. If every service—say, a supermarket—levies a service charge on purchases, it would be absurd. Banks wouldn’t be spared if they were to impose an extra service charge saying that this money goes to employees. Hence, it is probably time for government intervention.
Richard Thaler’s ‘nudge theory’ has been used across the board by the hospitality industry to get customers to pay tips. A five-star hotel serves a buffet meal in Mumbai at a certain rate. The bill adds a service charge and the waiter says that you can choose not to pay it. As it is already on the bill, you’ve been nudged to accept it. Another model followed is to have a screen box on a point-of-sale payment device with options of putting in a tip of 10%, 20% or 30%. You can skip it, but with a waiter staring at your nervous finger, you are likely to settle for 20%, the mid-point. Once again, you have been nudged.
Behavioural economics has taken over economic thinking ever since it was recognized that humans are not rational actors, but influenced by a plethora of factors beyond the realm of rationality. But the issue here is whether external nudges are appropriate.
Consider the government’s objections to some forms of advertising. Questions have been raised about the mis-selling of products based on attributes that do not exist or cannot be proven. Or, even if offerings are not oversold, celebrity endorsements are used as a special appeal. How does one evaluate this?
Complexion-enhancing creams have been an area of debate. Their brand ambassadors are often film stars. Here too, behavioural economics comes into play. Take the concept of ‘salience’ or top-of-the-mind association. We associate film stars or sportspersons with success and pick their recommendations even though these may be duds. Having such anchors for salience works on the premise of what Daniel Kahneman calls ‘System 1’ or fast thinking, where we go by instinct. Seeing a famous face endorse an offering, we often do not let the System 2 of our brains do the slow thinking that involves a reasoned evaluation of benefits versus cost. The ministry has begun to argue that brand endorsers, unlike ‘models’, are responsible for what they promote because their name and goodwill anchors perceptions of quality.
The Centre’s stance is consistent with its policy of stopping the mis-selling of financial products. But the ambivalence is over where the onus is placed. There are cases of sportspersons with modest educational qualifications telling audiences that “mutual funds are right". For this, government reproach is aimed at fund houses and crypto exchanges, rather than the individuals whose salience factor is being used to attract money. However, when it comes to routine-use consumer products, brand endorsers are going to be held responsible for misleading messages. In effect, a film star can indulge in all sorts of objectionable behaviour on a movie screen and not get pulled up for adverse influence on an audience—think of how heroes are shown stalking women in ways that would be punishable off-screen—but saying that a biscuit provides nutrition for the day can land the endorser in the dock.
Such contradictions need to be addressed. The ministry is moving in the right direction by asking restaurants to be more transparent in their final pricing. Its service charge could set a precedent for other industries looking to have customers reward employees directly. Similarly, misleading advertising for regular products is just as bad as mis-selling financial products, and while endorsers serve as anchors, judgement should be exercised, as they cannot be expected to research products beyond their fields of core competence. Ideally, companies must bear this onus.
Stretching the argument further, the government should perhaps also check prices and practices of the civil aviation industry. The concept of ‘convenience fees’ should be done away with, for example, as there is no basis for it. Airlines use a ‘nudge’ to make one reserve a meal or a specific seat by saying that it would be cheaper this way. Loopholes in consumer protection have enabled these devices of final-price enlargement.
Flight pricing logic might have held when airlines were in the low-fare game. But, today, the market has an oligopolistic structure and every player has raised fares on the grounds of needing to cover high fuel costs. As competition levels are low, the government should step in and regulate charges. Fares must be stated upfront. While add-on charges for meals, baggage, etc, are an international template for low-cost airlines, this system works well only if rivalry itself is regulatory.
It is good that the government has sought to correct market anomalies. We lack strong consumer forums that can discipline sellers in sellers’ markets. Industries have their associations that can lobby for rules that work best for them. What the government is asking for is fair play and transparency. This is timely and should be welcomed.
These are the author’s personal views.
Madan Sabnavis is chief economist, Bank of Baroda and author of ‘Lockdown or Economic Destruction’
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