“Double jeopardy” - How the market penalizes the poorest

Frédéric Dalsace, Professor of Marketing - November 15th, 2012
“Double jeopardy” - How the market penalizes the poorest

Poor households, already subject to severe financial constraints, suffer further collateral damage because goods and services are not designed for them. This creates conditions in which the poor end up paying proportionally higher prices for their purchases compared to other members of society. Faced with this reality, certain businesses are developing special programs that cater to low-income groups, with results indicating that such schemes can be a rich source of opportunity.

Frédéric Dalsace ©HEC Paris

Frédéric Dalsace (H85) has been professor at HEC Paris since 2002, where he holds the Social Business / Business and Poverty chair sponsored by Danone, Schneider Electric, (...)

See CV

Frédéric Dalsace, Charles-Edouard Vincent, Jacques Berger and François Dalens analyzed the budgets of poor households [the lowest income decile] and discovered that what might be termed “essential” expenditure — rent, taxes, loans, insurance and housing costs — is equal to 31% of their income. The money that is left for families to live on once these bills have been paid can be divided into two other types of expenditure: “necessary” expenses — food, transport, phone, health, education and financial services — representing 40% of household budgets; and “discretionary” expenses, such as clothes, household items, leisure activities, etc. On average, poor households of 2.2 people are left with only €420 a month to pay for clothes, furniture, leisure activities, etc. In addition, the market has adverse side effects: the “poverty penalty” that the goods and services that poor households do purchase are not designed for them.


QUANTIFYING DOUBLE JEOPARDY IN FRANCE

Double jeopardy is a well-known phenomenon in emerging countries, where it has always been put down to market inefficiencies. For the first time, this study makes it possible to quantify the double jeopardy mechanism in France. The authors discovered that poor French households pay an aver- age of around €500 a year more in additional costs, the equivalent to more than a month’s discretionary spending [this figure is only a statistical average; highly plausible scenarios indicate that it can easily exceed €1,000]. However, the way the study was designed minimizes the extent of double jeopardy because the research was limited to additional costs that can be measured in a purely statistical analysis. Accordingly, no double jeopardy was identified in, for example, the areas of food or transport, even though poorer consumers are more affected by low quality “budget” products or the price of spare parts for cars.


MARKET MECHANISMS

How can we explain these additional expenses? On the one hand, cost structures are often unfavorable to small-quantity purchases, as is the case, for example, with financial services where administration costs are fixed. Price structures can also penalize small volume purchases, with poor households paying an additional 20%in house insurance, which is more expensive per square meter for less sizeable homes. In addition, because the market is often tighter for low volumes, the price for goods and services consumed in modest quantities is frequently higher. For example, smaller accommodation is 5% more expensive per square meter than other forms of housing. Finally, as poor consumers do not have the means to afford quality goods, they often have to bear higher operating expenses that result in greater overall costs. Although financial and social aid is available, it is not enough to offset the additional costs generated by poverty; furthermore, many households do not benefit from this type of assistance.


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 Poor French households pay an average of around €500 a year more in additional costs, the equivalent to more than a month’s discretionary spending.



CUSTOMIZED SERVICES

The action tank Business and Poverty in association with the Social Business chair at HEC are working with businesses to put alternative solutions in place for poor consumers. These programs operate according to the social business model developed by Muhammad Yunus, winner of the Nobel Peace Prize, which consists of setting up a sustainable [i.e. non loss-inducing] economic model with a social objective. Rather than being based on volume effects, the success of these businesses depends on their ability to offer solutions adapted to local demand via, for example, co-creations with relevant groups to help understand their requirements and patterns of consumption; to identify appropriate targets; to involve local suppliers; and to set up alternative, accessible distribution channels. These initiatives act as real laboratories for innovation and serve to refresh a company’s overall business model as well as making the work of employees more meaningful, an avenue that an increasing number of businesses in France are beginning to explore.


Based on an interview with Frédéric Dalsace, his presentation at the “How can companies contribute to the challenge of sustainable development?” conference held at HEC Paris on June 21, 2012 and the article “Les pénalités de pauvreté en France: comment le marché aggrave la situation des populations pauvres” by Frédéric Dalsace, Charles-Edouard Vincent, Jacques Berger and François Dalens [Special Issue No. 4 of FACTS Reports,  January 2012, published by the Institut Veolia Environnement].


Further reading: Structurer le débat “entreprises et pauvretés”  by Frédéric Dalsace and David Ménascé [H99] [Revue Française de Gestion  No. 208-209, 2010] and L’entreprise contre la pauvreté  by Pierre Victoria, Frédéric Dalsace and David Ménascé [Fondation Jean-Jaurès, June 2011].

BUSINESS APPLICATIONS
BUSINESS APPLICATIONS

The trials carried out with the action tank Business and Poverty and the Social Business chair at HEC Paris include: the Optique Solidaire program, set up by Essilor with support from across the industry, to supply optical goods to the elderly for a net cost of a few dozen euros instead of the average €200; the MALIN program, run by Bledina [Danone], to facilitate access to food suitable for the nutritional needs of young children; and Renault have recently introduced the trial program Mobiliz for low-cost renting and repairing of cars in Renault Solidaires garages.

METHODOLOGY
METHODOLOGY

Commissioned by the Social Business chair at HEC and the action tank Business and Poverty, this study was carried out for the public good by a team from the Paris office of the Boston Consulting Group. The researchers analyzed the budgets of poor households using quantitative data supplied by INSEE in seven sectors of activity representing two-thirds of consumption [accommodation, food, transport, insurance, loans, phone charges and health]. They then studied the unit price differential in relation to the average consumer.