Baiyah , Do sau?! Costly signaling and price discrimination in autorickshaw negotiations

Those of you with less than a keen interest in economics might have decided to close your browser upon reading the title of this entry? You didn’t? Awesome, because I think that this is kind of interesting and generally applicable, despite the pretentiously academic title.

As a number of earlier posts attest to, Delhi merchants can be merciless in attempting to part foreigners from their rupees. After being here for a while, I mostly know how much things should cost, but, even outside of getting better informed, I have developed some strategies to deal with their machinations. Autorickshaw wallas used to never quote me rates below 100 rupees, and I had to really argue to get them to use the meter. Yet I have discovered that when I carry around my motorbike helmet, I get a reasonable rate to start out with. It is the same when I am on my cycle, but the motorbike helmet is much more portable. Furthermore, when carrying it, I am significantly less likely to get asked by people in slums what I am doing there (or if I am lost). This means that I carry the helmet EVERYWHERE I go, which my staff think is super ridiculous, but I am quite happy to do*.

My hypothesis is that this is an example of an economic signal. A quick explanation: Signaling becomes important when there is some market where two or more parties are transacting (in this case, me and an auto driver), and one of the parties cannot discern an important characteristic of the other party. A common example is in used car markets, where the buyer cannot accurately gauge the quality of a car: if the seller offers to give a warranty, which someone selling a poor quality car would not want to do (since it will quickly break, and force the seller to make good on the warranty agreement), then the buyer will know the car is of a good quality.

Here, the matter at hand is whether they should quote a high price, as they cannot immediately tell whether I am a tourist or an expat who knows how much things should cost. Saying that I am not a tourist is ineffective; for one, I can only say that in English. But more importantly, anyone, whether tourist or not, could easily say the same thing: talk is cheap. However, if I invest in something that would be too costly for a tourist on a short holiday, such as a motorbike helmet or even learning Hindi, then I differentiate myself from them. Thus the auto drivers will not quote me unreasonably high prices, because they can tell that I won’t put up with such shenanigans. I’ve been thinking a bit about other markets where this might be relevant: there’s probably tons of stuff on this type of thing already, but it’s more fun to think it through on my own! Perhaps its time for a randomized experiment, where I flip a coin deciding whether to carry the helmet or not?

So next time you’re traveling in a foreign country, maybe think about the possibility of using signaling so as to not get ripped off. Perhaps you can signal by learning a bit of the language, or maybe adopting the local garb. I’m staying away from the latter category, because western males tend to look COMPLETELY ridiculous wearing a kurta. But if you’re ever in India, it might not be a bad idea to invest in a cheap used helmet: you could save more than you’d lose!

*And KB can attest that I look awesome in the helmet, right?

P.S. Three days of entry in a row! Wooo, I really should be doing work right now…