Yeees! Pure Water! Pure Water!


In this post, and others to come, I have decided to focus more on Microeconomic issues in Ghana as suggested by Dr. Camara Obeng, my Economics Lecturer and attempt applying Microeconomic theories to them. I am grateful for the advice Doc!

Recently, the Public Utilities Regulatory Commission (PURC), the regulatory body responsible for Utility pricing and consumer protection, announced a 59.2% increase in electricity and 67.2% increase in water, at a time where inflation was at 17.7% and as expected, consumers were not happy about it. On 11/ 02/ 2016, the Ghana Statistical Service said inflation increased to 19% in January, water and electricity hikes clearly playing a role.

Sachet Water Price Discrimination
Rumours emerged that Sachet Water Companies & Distributors were expected to increase the price of a bag of Sachet water from GHc3.0 to GHc5.00. This is a 66% increase in prices, meaning, they, as water producers would be shifting the entire “water tax” onto the consumer because, water is a necessity of life, and therefore, has an inelastic demand. The consumer will still consume water, regardless of the price.

What actually happened in the University of Cape Coast, for example, is 3rd Degree Price Descrimination. You have to understand that, the University of Cape Coast is in-actual fact, divided into two(2): Oldsite, and Newsite. Within Newsite, there are heavily student-populated locations such as Amamoma and sparsely student-populated locations such as Kwaprow.

A bag of Sachet Water in Amamoma costs, GHc 5.00 whiles the same bag of Sachet Water is priced at GHc 3.50 in Kwaprow. This is a 66% and 16% increase in prices respectively. This is price discrimination, because Sachet Water Distributors are pricing the same commodities, produced at the same cost, at different prices, in two geographical areas. This is done to maximize profit because, Amamoma consumers are willing and able to consume water, at higher prices due to their high population, therefore, have a demand for water, which is highly inelastic. Kwaprow consumers on the other hand, have a less inelastic demand for pure water partly, because they are few, so there is less competition among consumers for water.

You might ask:”Why will the Distributor not price water in reverse (high in Kwaprow and low in Amamoma)?” You might be thinking Water distributors will have an incentive to price it that way because Amamoma is heavily populated, so more people will consume more at a lower price? The reason is simple: Amamoma consumers have a highly inelastic demand, so are less sensitive to price increments, which the producer exploits to maximize profit. Price discrimination is profitable in UCC because, Amamoma and Kwaprow have different elasticities of demand.

Transportation costs from Amamoma to Kwaprow is about GHc 1.20 in and GHc8 out (assuming a student is transporting bags of water back to Amamoma), currently. For Amamoma consumers to consume each bag of water at the price of GHc3.50 or less, they will have to buy a minimum of 53 bags, at a per unit cost of GHc3.47, after factoring in transportation costs. Anything less than 53 bags of water, and it will NOT be worthwhile since that will increase the per unit price.

The Sachet Water Distributor knows perfectly well that, due to the high transportation costs, and the unlikeliness of a student to purchase 53 bags of water at a go, means they will have little incentive to consume Sachet water sold in Kwaprow.
BUT, Amamoma consumers, could “waterpool” and combine their resources together, to purchase 53 or more bags of water from Kwaprow, thereby each enjoying a unit cost of GHc3.47 or less.

To anyone who read my blog post to this far, thank you! Please stay tuned for more!




Today, on the 30/ 01/ 2016 I write my first blog post. I have been wanting to blog for a while now and apparently, one of the best ways to revise some concepts is to write about them. Thats brings us here: Uber.

Uber, the ride-sharing Company/App fascinates me for numerous reasons related to Microeconomics. You have so many Economic theories interacting through Ubers Model of operation; Monopoly, Supply & Demand, Mergers, Perfect Competition, and Price Leaderships/Wars to name a few. All this is actually happening in the real world. So, today I’ll like to throw some light on one of the most recent development to have emerged between Uber and their close rival in the USA, Lyft; Price Wars.

Price Wars
The Price War between Uber and their competitor Lyft increased recently. Uber, the price leader announced on January 8, 2016 that they were cutting prices in a number of US States: 

Five and a half years in, we’ve learned that the single most effective way to boost demand during the winter slump is to cut prices for riders. Starting tomorrow—just like last year and the year before—we’re cutting prices in more than 100 US and Canadian cities, giving riders one more reason to head out of the house, ditch their keys, and avoid parking. Higher demand means more time moving people, less time spent waiting around and more money for drivers. And if drivers aren’t busier, prices will go back up again. In addition, we are guaranteeing earnings for drivers to ensure that no one is disadvantaged. That’s 24/7 incentives to put drivers at ease.

This is an attempt by Uber, to win greater share of the market from Ubers competitor, Lyft. In response, Lyft also cut prices to avoid losing market shares to Uber:

Lowering prices during a seasonally slow time, like the cold winter months, helps us make sure you can always get safe, affordable rides wherever you’re going

Ubers, in effect, is the Price Leader, because when they reduce prices, their fringe competitors like Lyft, are compelled to follow, or risk losing their customer base.

This race to the bottom in terms of pricing between Uber and Lyft is interesting because it cannot go on forever. Uber, as a Price Leader is in the position to make huge losses to make the ride-sharing industry unprofitable for its competitiors by employing what is known as Limit Pricing. Through limit pricing, Uber will charge very low prices which makes the ride-sharing industry unprofitable for everyone in the industry until they are forced to exit and it also discourages other ride-sharing companies from entering the market to compete. You might be asking yourself “Won’t it be also unprofitable for Uber?”. No. Uber has *deep* pockets where they can incur huge amount of losses just to drive their competitors out of business. In effect, they are willing to incur short run losses for long run profit, because in the long run, the limit pricing strategy will make them a Monopoly in which they could re-adjust prices by increasing to increase their profit margins.

Lyft, in an attempt to still stay competitive, has merged with other ride-sharing companies such as Didi Kuaidi to match Uber globally. This merger so far has not bared an fruits but it should get interesting from this point onward.

From time to time, I will write about other developments between Uber and Lyft, in terms of economics. I have big plans for my blog. I’m very grateful If you read to this far. Thank you and stay tuned!