By Akhil Raj Gupta
If youve ever had the opportunity to visit Delhi University, the rickshaw soon reveals itself as the ubiquitous mode of transport. Theyre everywhere; either navigating sluggish traffic jams outside Kamla Nagar or coasting freely downhill on the road parallel to the VCs office. While the temptation to convert this article into a diatribe on the lack of traffic regulation in North Campus is strong, I really want to discuss the underlying economic processes that govern the behavior of agents transacting in the rickshaw business.
Formal modeling of markets is difficult. All the rules that define a market form (For eg: monopoly, oligopoly, etc.) are rarely followed in the real world. The notion of perfect competition is a curious irony. It forms a reference point for normative study in almost every economics classroom, yet it is instantly dismissed as a theoretical construct or a figment of imagination. I strongly believe that the rickshaw industry is amongst the most representative perfect competition led markets in the real world today. While this leads to some interesting economic analysis by definition, I will also attempt to scratch the surface of the policy implications lying therein.
The method of reasoning is deductive. I will list out four textbook features of perfectly competitive markets and then facilitate comparisons with the rickshaw business.
- Infinite number of buyers and sellers
- Not to be taken literally, infinite participants automatically imply the existence of price-takers. More precisely, no buyer or seller can individually affect the price of the product in the market by withholding the decision to buy or sell. This is the archetypal feature of perfect competition where the existence of a very large number of sellers ensures no monopoly power. As a result, the market clears at a price determined by the dynamics of aggregate demand and aggregate supply.
- It doesnt take much effort to view this result in context of our given example. The fare for a journey is de-facto twenty rupees with no room for haggling. A rickshaw-wallah charging a higher price only stands to lose customers ad infinitum.
2. Perfect homogeneity of products
- This presupposes that competitive sellers in a market essentially offer the same product, weakening the prospect of any monopoly power existing within the industry. There is no competitive advantage.
- Even this assumption is strictly upheld. Rides are non-differentiable from each other. While certain allowances can be made for age, we expect older rickshaw drivers to be phased out of the market in the long run. This is squarely due to their inability to compete with the others on a daily basis.
3. Perfect information
- Due to the existence of non-asymmetrical information in the market, neither buyers nor sellers can deviate from the accepted market price. Such a scenario would prevail if rickshaw-drivers could systematically cheat travellers into paying a higher price or travellers could collectively bargain for a better deal.
- Although debatable, one can certainly spot a high degree of knowledge amongst students alighting rickshaws with opening day being the only exception.
4. Low barriers to entry and exit
- Neither natural nor man-made barriers can restrict entry and exit in a perfectly competitive market. Acquiring the means of production is a significant barrier for entry into heavy industries like steel, etc. due to the astronomical sunk costs involved. A logical extension of this is the absence of super-normal profits in the long run for perfectly competitive firm-owners. If a firm were making heavy profits from operating in a given industry, lack of barriers would permit entry of competitors thus reducing that firms share of the pie. Remember that no firm offers anything exclusive to the buyers and can earn profit only through market share.
- Rickshaws are often rented and not purchased. The fixed capital requirements therefore are literally zero. Working capital acts as sufficient financing for a rickshaw driver to pay for his machine, and generate some amount of wages that are sufficient to keep him in business.
The last point is salient and worthy of more consideration. If every rickshaw driver earns within the same range, he must also face the same costs to maintain parity of profit and subsequently standard of living. This is an aspect where government regulation should be mandated because the ownership of rickshaws lies in the hands of a few contractors who often discriminate per their whims and fancies. Although I have not conducted a formal survey, cursory questioning reveals that the rent band is as wide as Rs. 900-1500 per week. The wedge is hefty enough for a rickshaw wallah to honestly believe that luck rather than hardwork would be a more important determinant of his survival. We are certainly far from an ideal situation.
Akhil is currently in his second year at college, pursuing a Bachelor of Arts degree in Economics (Hons) at Sri Ram College of Commerce, University of Delhi. He has been passionate about writing since an early age and is currently involved with the official College magazine and Economics Department magazine at SRCC. His areas of interest include behavioural economics / finance, econometric analysis, macroeconomic policy, and political theory. He spends his free time reading extensively, watching interesting videos on YouTube, and trying to convince everybody around him that he really does know a thing or two about economics in the midst of all the pontification!He can be reached for feedback at akhilrajgupta@gmail.com