Fixed Price

The problem with a lot of touristy places is that there are no fixed prices. While this means that vendors can practice effective revenue management, it also means that it is easier for them to cartelize and take the tourists for a collective ride.

I realized this during my recent trip to Sri Lanka where you need to find someone you trust to get “access” to some place. But then it is most likely that any possible intermediary is more loyal to the service provider (due to regular contact etc) than to the tourist. So the tourist ends up being screwed no matter what.

Later that night we were to figure that even the bargained prices that we paid at the wood factory were heavily inflated, and things were available for a fourth of that price (!!) at the souvenir shop attached to our hotel in Nuwara Eliya. Where else in the world do you see prices in hotel souvenir shops being significantly lower than close to the source?

So this agent business continued through the trip. We wanted to go river rafting, so we (once again) trusted our driver to find us a nice service provider. The following day we wanted to go on a boat ride up the Bentota river, and we had the (unenviable) choice of our hotel and the driver (yet again) to serve as intermediary.

What makes matters worse is that if you go without an intermediary prices are likely to be even higher. It’s as illiquid a market as you can find. But whichever intermediary you choose you are likely to end up paying much above market values. It’s not often that you find (supposedly) altruistic intermediaries such as the Gift Shop at the Grand Hotel in Nuwara Eliya.

So I wonder what drives a market from this kind of state to one where prices are fixed, and there are menus (interestingly in Sri Lanka you don’t find menus in many places. you are charged an arbitrary sum). It is unlikely to be regulation, since smart players are always a step ahead of the regulators. It has to be some market characteristic that tips the market in favour of transparency and efficiency. I’m trying to figure out what it is.

(this suddenly reminds me of a recent attempt by an investment bank to try create a private market for shares in a private technology company. Clearly the market in shares has “tipped” in favour of transparency, for the attempt hasn’t been as successful as initially imagined)

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