Set The Controls

How much should you pay for a beer? The editor of "The Bulletin" believes that the price should be controlled. One price, or one maximum price perhaps across the board. The context of this suggestion is the news that Mallorca is leaking tourists to the non-euro-zone destinations, Turkey most obviously. This is understandable, up to a point. The weakness of the pound, for the British visitor, makes alternative holiday centres attractive; the contemporary holidaymaker is a creature of price-sensitivity, and he has, courtesy of the internet, chapter and verse as to what it costs in different locations and where to go. Turkey may be flavour of the weak-pound month and year, but Mallorca, despite potentially greater expense, benefits from being nearer and from not being as damn hot. A Balearic summer may occasionally be excessively warm, but the Turkey and Greece of high summer are places of almost heat danger. But be that as it may.

The thrust of the argument in "The Bulletin" is that price control is needed, a) as a response to the strength of the euro, and b) as a means of preventing the island from pricing itself out of the tourism market. We've been here before. I've questioned the wisdom of the price control argument before, and so I will again.

Price controls do exist in Mallorca, for example with tobacco which is available at uniform prices via the monopolistic distribution channel of the tabacos. Price controls are not, therefore, unknown mechanisms, but the control of the price of a packet of 200 Lambert and Butler is quite a different thing to the price of a beer. In general, price controls are anathema to a freely functioning market; imposition of a price cuts away at one of the main tenets of how a business operates. In terms of a bar or restaurant's marketing, price is or should be a matter of judgement together with the other elements that comprise the 4Ps (alongside promotion, product and place). But to take the example of beer, what is one talking about precisely? There are numerous beers on offer via various bars. Each one attracts a variable in terms of it supply cost, and each one offers the bar-owner the opportunity to price according to what he believes his market can bear. A Saint Mick is not the same as a Thwaites or a Guinness. How would a price control work? Are we seriously to believe that each brand would have a set price levied with no scope for fluctuation up or down? What might be sensible in terms of market acceptance along Alcúdia's Mile or Magaluf´s Strip is not necessarily as sensible in Portals Nous.

Bars, in addition to their supply costs, have their own overheads to factor in, and these have all increased - energy, petrol, social security. Then there are rents to cover, to say nothing of all the additional costs related to taxes for this and that and the hygiene requirements that mean having to fork out for certain items of equipment. The bar's price equation is market acceptance complicated by the overall business margin requirement. Put a one-price fits all stamp on a glass of Saint Mick and the rest and it could be the end of some bars. And what would this price be? Who would set it? Who would know at what price to set it? Again, you have the variance of locations to take into account.

There are other factors at play - competition, whether the bar offers (and therefore has to pay for) live entertainment. And let's assume that there was a set price. Who would control and enforce it? And, as pertinently, who would have to pay for that control bureaucracy to be established? Bars have to be left alone to set their own prices. That they may be too high or too low for the immediate market is a mistake for them to be allowed to make, but it has to be their choice. The price-sensitive tourist is pretty savvy. If he goes to a bar and pays two more euros for a certain beer in one place but then finds it is two euros less down the road, then he will go down the road, unless there are elements of the more expensive bar's marketing that make him swallow the higher price. It's the consumer's choice as much as it is the bar's choice.

I'll give you an example. In Puerto Pollensa, a pint of Mahou costs almost two euros more at a bar in the church square than for the same pint at a bar close to the square. The bar in the square is basically a bar only. It offers snacks but not whole meals, which the second bar does. Turnovers and profits are therefore arrived at by a different mix of sales. Moreover, the bar in the square has location. The punter may prefer the ambience of the square to a bar away from it. And he pays for this as well he may also pay for a higher rent. One price for the Mahou may suit one bar but not the other, besides which the bars have to be allowed the flexibility to differentiate themselves, and price is one of those means of differentiation.

Create a price control and you start to move to not only uniformity of price but also uniformity of bar. Price controls are a statist intervention; they were beloved of centrally controlled economies and they abhor innovation and differentiation. Let's take another aspect of price - discounts. A bar, if it so wishes, can offer incentives in the form of discounts in order to attract custom from the competition. Under a price control mechanism, how would discounts work? The answer is that they wouldn't. Control the price and you also control the bar-owner's ability to play with another of the elements of the marketing mix; discounts may be price but they are also promotion.

I'm afraid that the price-control argument is too simplistic. That Mallorca's bars may have become more expensive is a function more of macroeconomics than it is of the micro version of how the business itself operates. The imbalance in the exchange rate is a market mechanism at the macro level; to seek some redress by market interference at the micro level makes no sense. The price of a beer is not irrelevant as it is one of those things that the tourist can easily make an assessment of, but in the wider context it is far less relevant. But let's assume again that there were to be a price control, why stop at beer? Why not control the price of a burger and chips, a hotel room, an excursion?

Mallorca's difficulties are complex. It is a mature holiday market, struggling to diversify, which is a normal process for any "business" at the mature stage of its life cycle. It finds itself in a highly competitive market in which the rules are not the same, the exchange rates being one of them. It also finds itself faced by what may only be temporary conditions but are nonetheless difficult conditions - the credit crunch most obviously. It does also find itself becoming more expensive, but this, in part, is the consequence of its success and its wealth, much of it founded on the benefits brought about by euro-zone participation. Controlling beer prices is no solution. The market will ultimately decide, and the market's decision may not be to everyone's liking.


QUIZ
Yesterday's title - well it was Talk Talk. I have no youtube for the song but no matter as it gives me an excuse for something else by what was a top band - here is "Living In Another World" (http://www.youtube.com/watch?v=3V6CdsAMGYk). Today's title - the controls were set for what, and by which band?

(PLEASE REPLY TO andrew@thealcudiaguide.com AND NOT VIA THE COMMENTS THINGY HERE.)