Well, the ah beng mobile phone shops at Sim Lim Square have done it again, and the fiasco over Mobile Air‘s antics have once again drawn attention to dubious sales tactics deployed at the digital mall. Once again, we see the all too familiar headlines, repeated over the years: Sim Lim Square gets 2 to 3 complaints daily (ST, 4 Nov)
The recent incidents have even prompted Stuff.Com to put up this article: 7 tips to survive Sim Lim Square, in a bid to initiate the uninitiated into the do’s and don’ts at Singapore’s most renowned — and infamous — digital malls.
And despite calls from the netizen vigilantes to boycott errant shops, I bet you the complaints would only go up in December as Christmas shopping sprees begin. It’s a pattern we’ve seen recurring over the years, and it’s resilience makes one wonder why we just can’t seem to beat the cheaters at Sim Lim Square, despite the bad press and calls for boycott.
Game Theory Reveals All
If you’d watched A Beautiful Mind, you probably would have heard of Professor John Nash and his famous Nash Equilibrium. Now Sim Lim Square is a perfect example of collusive games applied, with the dominant strategy being it pays to join the touts and cheaters than if you didn’t.
For those of you who have no freaking clue what I just said, here’s where the armchair economist in me will try to explain it to you as simply as I can (lemme grab a cup of coffee first to go with it).
The environment of Sim Lim Square
Sim Lim Square may be a collection of small business enterprises seemingly in competition with one another, but as far as business tactics go, and as the prices of products reveal, they’re all in collusion with one another. Of course, they can’t be explicitly colluding, because then they would be in breach of the Competition Act; but rather a more tacit collusion where the prices each shop charges is sending signals of whether or not you chose to play ball with the others.
It’s a simple way to gain monopoly power when you’re a collection of small-cap shops banding together, and they have effectively put in place a price discrimination model that, as demonstrated in the Mobile Air case, clearly charges a set of prices for locals and foreigners.
Economics 101 — in a perfect competition scenario, prices will be low such that no one firm may have the opportunity to earn what we economists call super-normal profits. Granted, prices of gadgets sold at Sim Lim Square may be lower than what you would find elsewhere (if you were local), but it’s not as low as it could be if they had really been in competition, and in accordance to the laws of demand and supply.
It’s the same as car workshops and wholesalers: pool in a common geographic location, then collude to charge the same prices so everyone gains. It doesn’t matter which shop you choose to walk into, the prices are more or less the same (a couple of dollars off don’t make much of a price differentiation in reality), and if you wanted something that I didn’t have in stock, no problems, I just walk over to my neighbors’ and get stock.
It doesn’t matter which shop you step into, the price differentiation is negligible at the end of the day.
How the game is played out
In a collusive game, the dominant strategy is really to work with your neighbors to charge the colluded price, or range of prices. For illustration, refer to the matrix below:
For simplicity’s sake, let’s just assume 2 players, A and B. We assign arbitrary numbers to consider the pay-off to each player in 2 strategies, Cooperate, i.e. charge the agreed prices, or Defect, i.e. charge lower prices.
Obviously the player that defects would stand to gain because he would be able to get more customers buying his goods (player who defects sells 4 units, versus the player who doesn’t at 1 unit). Say in round 1 of the game, Player A defects, thereby selling more units than B does, and in subsequent games, B learns that regardless of what he does, A will simply charge lower prices: the result, a price war, and in the end, both players end up in a lose-lose situation where they each only sell 2 units.
But if they both choose to cooperate, notice that they now are able to sell 3 units each –> the win-win scenario.
That scenario certainly always works out when both players agree to collude and cooperate.
In a real world scenario of multiple players like Sim Lim Square, merchants learn that it pays not to try to beat the competition — because of the large number of firms in the mall, non-cooperative players will discover soon enough that there are repercussions in trying to deviate from the other players: loss of business referrals, reduced bargaining power with suppliers etc.
Of course, the strategy we discussed above pertains simply to prices of products and services; there are various other ways the merchants could cooperate and collude for the collective good of everyone’s businesses, and reality is that nobody wants to “spoil market”, as what we Singaporeans always say. And from there, the merchants start to become more brazen in the way they deal with customers, from arrogant belittling of people who cannot afford the prices they want to charge, to ridiculous scams like charging thousand-dollar warranties for products. Why? Quite simply, because they realize they can afford to, and can hold customers hostage through their ridiculous scams.
John Nash argued that in the absence of perfect information symmetries, the outcome of any game would almost always veer towards lose-lose; how do you tell if your neighbors are going to keep to their side of the bargain? Simple: you simply take a walk around the complex, and look at the models and prices advertised on the placards they display to attract interest. In fact, they serve as tacit signals to the rest that “hey, I am playing by the rules”.
The implicit understanding in the retail business is that no one firm has the ability to hold consumers hostage, not unless you’re a giant like Microsoft or Apple (but even then, the big boys do play cooperative games too to retain their supernormal profits), but unity is strength, and collectively, the merchants by turning it into a “us versus them” scenario can, and do, have the ability to dictate prices and hence be able to say, “not happy, don’t buy lor“.
Are the boycotts any good then?
The answer is simply: No. The reason is because it’s not just that one shop with errant practices, but the entire mall, so unless you were planning on boycotting Sim Lim Square, it really doesn’t make a difference. All it serves is to send the signal to the retailers they hold you hostage as a consumer, that the more threatened you feel, the more you reinforce the notion that they are in a better bargaining position.
It’s a case of “I scratch your back and you do mine”, and nobody wants to rat out on their neighbors in that sort of an environment.
So the next question you may ask is what do I do then if I want to have a good bargain?
The Competition Act outlaws anti-competitive behavior such as price-fixing and collusion in Singapore. Unfortunately, unless you can prove such collusion exists, or were planning on forming your own buyers’ cooperatives to buy handphones and computer parts, in reality, we as consumers have very little options. To make it worse, the collusive behavior of mobile phone shops and car workshops alike are not explicit agreements, but more tacit in nature. It’s the typical “open secret” scenario, and that’s capitalism for you.
The only real solution to beat the cheaters at their game is to remove whatever information they may have with regards to pricing, promotions etc. Price-bidding systems, for instance, are one way you can minimize the opportunities for collusion by retailers, because it’s the consumers who dictate what is the market price, not the sellers.
However, the application of such a system is time-consuming, and no retailer in his right mind would agree to such a system, because it increases the costs of his sale, not to mention the time it takes to sell just one product.
Some people have suggested online shopping is the way to beat the cheaters, but as it is, even in this day and age, and even in a place like Singapore where the adoption of mobile technologies is one of the highest in the world, buying things online is still not the primary mode of consumption.
I doubt very much that the Mobile Air fiasco would change the way things are over at Sim Lim Square; and with Christmas beckoning, something tells me we would only see more such cases on the rise.
Alpha Male Syndrome
*The author blogs at http://alphamalesyndrome.wordpress.com