Unbranded identity, prices and economics

When you have your next cup of coffee at the airport, compare how much you are willing to give to this ten minute experience. You visualize the extremely complicated product you are making in your factories and the cost of marketing and distributing it and how pricy it looks compared to this cup of coffee.

The other day we had some taste of unbranded identity; taking a coffee from a airport joint, the product had no clear identity as a brand nor the restaurant. Gave us goose bumps when a cup cost Rs.250.  But we drank it anyways.

Not every unbranded product has fared this far in terms of prices, the divergence is very striking as we will see. But the same is true for branded products as well.

It led me to think firstly that airports must be charging a lot as lease, rentals or other expenses and secondly that there were only one or two joints serving coffee but the very fact that we were prepared to pay that much was intriguing.

This same airport twenty years back was serving a cup of coffee inside at less than Rs.10. It was from the same coffee machine or was prepared by someone on a stove, boiling milk and water. What prompted us to pay so high was simply that we allowed ourselves to believe that the experience was not substantially different from the experience of buying from a branded joint or that the setting was such that there were no cheaper alternatives. Lack of supply in this case perhaps was the principle reason for our buying behavior but the top of the mind recall of the price of a branded experience converged as well.

Unbranded service or product actually could appreciate 25 times in 20 years, which is roughly the same or better than what brands have done. So actually brands have helped the prices of unbranded products to appreciate as well.

Let me take a few other examples on the unbranded side but with a twist. Eatables like meat (especially mutton) or fish has appreciated several times. I actually have the number.

In 1990 a kg of mutton cost Rs.80 in the Calcutta market, same as a kg of Aluminum. Both these unbranded products today have grown in prices in a divergent manner. While Aluminum today could be costing Rs.160 a kg in that same market, mutton is touching a whopping Rs.450 per kg.

Unbranded products or commodities are like “every unhappy family is unhappy in its own way”. There are many factors which determine their price trajectory, almost all of them are driven externally and are not in the control of the producers at all.

The general equilibrium theory (Walrus was the father) that economists have proposed explains this phenomenon of prices. Let me try to simplify this concept.

Prices of unbranded products are related to marginal utility. Take water and an additional bucket would have far less utility, but take diamonds and an additional carat would be valued far higher as the utility rises. Marginal cost and utility must go hand in hand. The additional water needed no great effort so it cost less as well, but additional diamond would need more resources to be deployed. What governs supply is the labor or material content that must be deployed and supply also determines whether we want more or less of this product. But this eagerness of wanting it determines the value of the commodity.

Weber writes in his book “Price Theory of Economics” that “Walras links the idea of price to the value of an object in an exchange economy by noting that the market price of a good tends to increase as long as there is a positive excess demand, while it tends to decrease when there is a positive excess supply. The associated adjustment process is generally referred to as Walrasian tˆatonnement (“groping”).”

But there are many other factors to look at. If markets become truly global and if a product can move geographically, logistics cost becomes a very important factor and as logistics costs go down the relative difference of prices in regions comes down. Trade distortions and government interventions play a big role as taxes and subsidies play havoc in the pricing model.

Markets are also not entirely efficient and rational agents could also behave irrationally. The introduction of competing branded products changes the dynamics of prices, so do the externalities as they weigh on the prices as spillover effects take over.

The industry structure cannot be lost sight of as well and this could be different from one region to the other. The role of information and signaling cannot be ignored and that leads us to monopolies or oligopolies.

This could go on and on. Economists have some explanations but there are more questions than answers when it comes to branding power and the association to identities that could influence prices of certain items disproportionately than the others.

When you have your next cup of coffee at the airport, compare how much you are willing to give to this ten minute experience. You visualize the extremely complicated product you are making in your factories and the cost of marketing and distributing it and how pricy it looks compared to this cup of coffee.