Name your price: it’s your life

Published online January 25, 2012.

Why small increases in price can lead to a steep decline in demand for essential products

A piece of nylon netting is a useful thing. It can be cast as a fishing net, hung as a curtain, or draped over a seedbed as protective covering. Netting can make a stunningly white wedding dress, or even a make-shift chicken coop.

One can also sleep under it, of course, to keep mosquitos from biting at night. Though insecticide treated nets (ITNs) are routinely distributed in malaria endemic regions, often subsidized by major donors such as the Global Fund, many worry that such campaigns are frequently futile. Anecdotal evidence from the Kenyan shores of Lake Victoria to the alters of Ugandan churches suggest that these bednets are sometimes quite literally cast aside or otherwise misused.

While misuse is certainly problematic from the perspective of those funding mosquito net campaigns, it also raises a broader question, and one with serious implications for public policy in malaria prevention and beyond: Do people value and use things that are given to them for free?

There are two competing arguments used to answer this question. The first argument says that people value more that on which they spend their own money or resources. Furthermore, people will spend some money, when they can afford it, on those objects that they perceive to be useful. A second argument says that if an object is perceived to be useful or of value, people will use that object regardless of whether they purchased it or whether it was given to them for free. The ubiquity of incumbent presidents’ campaign t-shirts in both opposition and stronghold areas is supporting evidence for those in the latter camp.

The mosquito net-cum-wedding dress is a classic illustration of the dilemma of freebies. The protective power of mosquito nets against mosquito bites and thus, malaria, is rather less effective when the net becomes a nuptial adornment or is tossed into a river, much less left in its packaging and stashed in a corner. The creative use of nets is thus often the go-to anecdote for those in the first camp of the freebie question.

Anecdotal evidence, unfortunately, can only get us so far in adjudicating between these two perspectives. Fortunately, a number of development economists have been systematically evaluating the extent to which people use services or tools given to them for free and those provided at a cost. While there is still no definitive answer, and while context matters, much of the evidence seems to suggest that people use many free goods at high rates, and often will not purchase the same products when provided even at very low prices.

A group of researchers at the Abdul Latif Jameel Poverty Action Lab, based at the Massachusetts Institute for Technology (MIT), recently wrote a report summarizing ten studies examining the question of whether user fees and cost-sharing increase or decrease the use of health and education services and products. The majority of the studies were conducted in Kenya, although some were also conducted in Uganda, Zambia, and India. Their findings are striking, and the title of the report says it all: “The price is wrong.”

Time and again, small increases in price lead to a massive decline in demand for products including water disinfectant, deworming medicine, mosquito nets, and soap. For example, one study in Kenya found that while over 80% of people used a mosquito net if they received it for free in a prenatal clinic, only 20% would purchase the net for $.60 (approximately 50 Kenyan shillings or 360 Rwanda Francs). Similarly, another study in Kenya found that while nearly 60% of people used water disinfectant when it was given to them for free, less than 10% would use disinfectant if charged $.30 for the same product. This general pattern appears to repeat itself in different locations and with different products.

Two things are thus evident. First, people are often unwilling to purchase a number of goods and services that promote health and education even at highly subsidized rates. Second, people often use those same goods and services at high rates if they are provided for free. Clearly, receiving something for free does not preclude its use. If we think back to the wedding veil problem however, it is also clear that some products may not be used as prescribed, fee or no fee.

Why are people so sensitive to price when it comes to potentially life-saving goods and services? Individuals and families weigh the costs, monetary or otherwise, of procuring and using goods and services against the expected benefits from using those goods. Bednet wedding veils notwithstanding, in most cases it appears that families perceive some benefit from using goods like mosquito nets and soap, since rates of usage are quite high when the product is free. Some speculate that people may not physically have the cash on hand to buy even very inexpensive products, or that other inconveniences, such as the time it takes to procure a product, may affect their decision. But these are only partial explanations. It is also possible that people do not believe products will be as efficacious as researchers and policymakers think they will be in promoting their health.

Available evidence suggests that people who receive goods and services for free often do use them, although the extent to which they will use them and how they will use them is subject to some debate. Even if there are large benefits to providing free bednets, water disinfectant, soap and the like, products that often provide benefits that extend beyond the individual recipient, the question of sustainability comes to the fore. In the short term, the provision of free goods and services, particularly those that promote preventive health behaviors (like hand-washing) may have large and positive effects on the health of families and communities. But ultimately, we need to better understand why people are often so unwilling to spend even small amounts on products that have the potential to keep their families much healthier.

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