What is so sacred about Rs.100?

21 Dec

Dissecting the  price tag of Rs.100

I have been trying to figure out the importance of brokerage charge of Rs.100 per lot for the F&O segment trading for quite some time now.In this post i will try to analyze ,probably, how do these brokerages get away with charging the same charge for their services in F&O despite the market being supposedly competitive.

In any market the pricing of products or services is dependent on the following:

  • competitive position— brand equity + market share
  • cost of product
  • product quality.

Competitive position

Business wisdom says that the pricing should be based on competitive positions(market share) of the market players and  their “brand equity”.

  • Economies of scale allow the firm to distribute costs across a larger number of customers and provide the service at a lower cost than other firms.
  • Brand equity allows a player to charge higher for a service Eg. Apollo Hospital Vs. your local doctor.

Competition

Cost of Product

The cost of product will ideally be different for all the players, because of their selling and administrative costs. That’s where i feel that we are having wool pulled over our eyes. The reasons are as follows:

  • The market share of a Kotak, ICICI and Standard Chartered(just an example) are bound to be different due to their reach and different spends on marketing. Bigger players divide these spends across larger number of customers and can incur smaller costs.
  • The law of competition says that firms will try to undercut each other when they sense a risk or want to grow their market share.

The absence of different prices  hints a tacit understanding between the players.

Product Quality

None of the brokerage firms can claim that a rupee invested through their firm will generate greater returns compared to their competitors, at least not rightfully. I guess this more or less rules out product quality from the equation. However, grievance handling mechanism and service quality can be differentiators.

I believe it will be difficult for Brokerages to keep harping about their service quality because in a matter of time the “quality of service”— reliability and timeliness — become a basic necessity. Even now, I believe online portfolio, automatic hold and transfer of money have became such basic things that no customer might accept it as a differentiator.

Discount Brokerage Firms

Recently I came across a brokerage firm named Zerodha that charges Rs.20 or .05 % whichever is less. I sincerely believe that no firm will try a stunt like this if the business was not profitable. May be they have plans to earn by educating their customers or from increased volumes. However, it clearly shows that we are being ripped off by the existing players.This simply means that the brokerage charge of Rs. 100 is in fact arbitrary or irrational . If it was impossible to charge clients anything less than Rs.100 than how could these discount brokers even plan to exist at such low prices?

CCI hunt for Cartels

Cartels

Cartels

I have noticed significant increase in action by CCI recently. First it was Cement manufacturers and now Automobile manufacturers are on the hook. I don’t know how the competition commission of India compiles its report but i find it hard to believe that almost all brokerage firms charge Rs.100 per lot for Option trading. There has to be some rational explanation about why derivatives trading service is offered at such obscenely high prices by almost all existing players.

It seems highly unlikely that different companies with an even more varied marketing spends can end up having the exactly same brokerage. This is like saying that Lays and Haldirams are spending the same amount of money on marketing and promotions.

Another tricky thing is why none of the firms with lower market share are trying to increase their customer base by trying to sell at a lower price?I believe there is not sufficient evidence to say that there is a cartel, yet. However, the fact that there are no variations in the pricing models of any of the major firms clearly shows that the prices are not competitive.

PS: I have not been burned by my broker and this is not a post written in a fit of anger.

Advertisements

One Response to “What is so sacred about Rs.100?”

  1. Pratik Deora January 8, 2013 at 10:58 am #

    Worth a read

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

DIY PR guide

Settle in Canada

Capital Mind

active investing

Quest for Value

Price is Everything. Price changes Everything

Fundoo Professor

Thoughts of a teacher & practitioner of value investing and behavioral economics

%d bloggers like this: