Monday, February 25, 2008

Dual price systems

The passing of the baton from Castro to Castro in Cuba is a good opportunity to study a little bit the Cuban economy. One aspect of it is that is essentially works in a dual mode: one economy with low prices denominated in pesos, essentially for locals, and another one in dollar with prices about twenty times higher. It is natural to blame the government for this situation, but it turns out this can also arise in a market economy in the absence of a government.

They key point here is information. Joseph Stiglitz already explained this in the case of a discriminating monopolist in 1977, he can charge different prices to different customers based on their characteristics by provided slightly different goods. One example would be the pricing of airline seats, where the same seat may have a different price depending on where, when and how it is bought. One particular way discrimination may happen is with the heterogoneity of information in the clientele. Who has not paid much more than usual (as measured by local customs) for a good while visiting a foreign country? Taxi drivers are particularly good at discriminating foreigners from locals.

Taking the taxi example, imagine a city where the taxi market is completely unregulated: free entry, market price. You are an uninformed customer dropped into this city and need a cab. Once in the cab, you are facing a monopolist, who quotes a price. You have no way of determining where the price is fair or usual. You will pay much more than the locals. Only government regulation would make this discrimination disappear.

In Cuba, the government is not regulating against this type of discrimination because it is benefiting from it: those discriminated against are foreigners, and the government is the monopolist. But a free market would probably lead to a similar price discrimination.

PS: In silly news, Ireland just guaranteed itself again a last rank finish at the Eurovision Song Contest.


Anonymous said...

You can get as informed as you want--and many do, especially when going abroad. With regulation and such, there's no longer any choice.

Not to mention the embarassing stylized fact that governmental behavior is not about efficiency. :-)

I often run into such whimsical, treatments of communist states, uh I mean prison camps. They're usually from people from the West.

Economic Logician said...


Think about what the government is maximizing here. Something that certainly does not include the welfare of foreigners. The standard efficiency argument does not apply here.

Bruce Webb said...

"But a free market would probably lead to a similar price discrimination."

And does. Dual pricing is pretty much a feature of any tourist based economy. It doesn't always result in dual currencies, but often does, there being very few tourist destinations anywhere where you can't use dollars to pay multiples of what locals pay for various goods and services, thus explaining the popularity of such guidebooks as Europe on So Much a Day. The main difference I see is that countries like the old Soviet Union and China and Cuba today can attempt to maintain institutional control by limiting currency conversion. Operationally this acts as a tourism tax. But for the most part tourist markets operate just as you would expect when customers not only are operating at a distinct disadvantage in information but may well be desensitized to pricing to start with. (The 'hey we are on vacation!' effect kicking in.)