Last week,
there were two major news items on price changes in Hong Kong. One is
the increase of monthly rental payments of public housing announced by
the Hong Kong Housing Authority (HKHA). Another one is the fare
adjustment of the Mass Transit Railway (MTR), the city’s train operator.
Both organizations came under heavy public criticism for the price
increases. Some news headlines even criticized the price increase as
being “crazy,” indicating that there is a big expectation between public
perception and corporation actions.
From an economic and legal point of view, the price adjustments of the two organizations are completely legal. The price adjustments have been carried out in accordance to the so called “Adjustment Mechanism” which includes pre-determined formulae for calculating the price hike amount. In the case of public housing, the increase is linked to household income hikes, capped at 10 percent. In theory, if households have income increases, they should be able to afford to pay more. Hence higher rent has its logic. In the case of the MTR, the adjustment is linked to inflation and salary changes of the transportation sector. In theory again, if inflation occurs and salaries of transportation workers increase, it is also reasonable to ask for a fare increase. Of course, the above two scenarios are all in theory. In practice, any price increases are unwelcome events.
From a corporate point of view, the beauty of having a price adjustment mechanism is to reduce the ambiguities over future price changes. Since many of the price changes are related to public goods, any price change decisions are sensitive. If every price change is to be determined by subjective methods, a lot of energy will be wasted in the negotiation and no outcome will be welcome by stakeholders. Hence, to minimize disagreements, organizations prefer some forms of automatic price adjustment mechanisms. Ideally, the mechanisms should follow some preset numbers and formulae. The game rule is to be objective so that there is not too much room for debate. In other words, the mechanism is designed to be as mechanistic as possible.
As explained, no price increase is a welcome act. Even if the price adjustment mechanisms are reasonable and legal, people will still protest against the results. In the case of price increases in public housing and the MTR, both organizations tried to pacify the public by giving away concessions. For public housing, all tenants can receive one month rental holiday. For the MTR, monthly pass for specific route is given, as well as the one free single journey ticket for every 10 rides. These concessions aim at upholding the price mechanisms on the surface, yet can offer material discounts to the stakeholders.
In spite of the fact these measures are real concessions, stakeholders are not satisfied with these measures. For the HKHA, the rental relief will lead to a further operations deficit of HK$ 1 billion in public housing. For the MTR, the concessions will take away all the benefits originally generated by a fare increase. Nevertheless, stakeholders simply are still not happy with the outcomes. They demand a reduction in price increase or simply have no price increase. These incidents also reveal the fact that the current mechanisms cannot capture stakeholders’ sentiments. When public perception dominates rational decision making, it is not possible to explain the correct rationale behind the price increase.
Hence, there should be modifications to the existing mechanisms. This idea aims to improve the current mechanisms so that public perception can well be catered to. At the end of the day, public perceptions play an important role in affecting policy changes. Without the public support, it is not easy to carry out effective management.
The author is Dean School of Business at Hang Seng Management College. The views expressed here are entirely his own.
From an economic and legal point of view, the price adjustments of the two organizations are completely legal. The price adjustments have been carried out in accordance to the so called “Adjustment Mechanism” which includes pre-determined formulae for calculating the price hike amount. In the case of public housing, the increase is linked to household income hikes, capped at 10 percent. In theory, if households have income increases, they should be able to afford to pay more. Hence higher rent has its logic. In the case of the MTR, the adjustment is linked to inflation and salary changes of the transportation sector. In theory again, if inflation occurs and salaries of transportation workers increase, it is also reasonable to ask for a fare increase. Of course, the above two scenarios are all in theory. In practice, any price increases are unwelcome events.
From a corporate point of view, the beauty of having a price adjustment mechanism is to reduce the ambiguities over future price changes. Since many of the price changes are related to public goods, any price change decisions are sensitive. If every price change is to be determined by subjective methods, a lot of energy will be wasted in the negotiation and no outcome will be welcome by stakeholders. Hence, to minimize disagreements, organizations prefer some forms of automatic price adjustment mechanisms. Ideally, the mechanisms should follow some preset numbers and formulae. The game rule is to be objective so that there is not too much room for debate. In other words, the mechanism is designed to be as mechanistic as possible.
As explained, no price increase is a welcome act. Even if the price adjustment mechanisms are reasonable and legal, people will still protest against the results. In the case of price increases in public housing and the MTR, both organizations tried to pacify the public by giving away concessions. For public housing, all tenants can receive one month rental holiday. For the MTR, monthly pass for specific route is given, as well as the one free single journey ticket for every 10 rides. These concessions aim at upholding the price mechanisms on the surface, yet can offer material discounts to the stakeholders.
In spite of the fact these measures are real concessions, stakeholders are not satisfied with these measures. For the HKHA, the rental relief will lead to a further operations deficit of HK$ 1 billion in public housing. For the MTR, the concessions will take away all the benefits originally generated by a fare increase. Nevertheless, stakeholders simply are still not happy with the outcomes. They demand a reduction in price increase or simply have no price increase. These incidents also reveal the fact that the current mechanisms cannot capture stakeholders’ sentiments. When public perception dominates rational decision making, it is not possible to explain the correct rationale behind the price increase.
Hence, there should be modifications to the existing mechanisms. This idea aims to improve the current mechanisms so that public perception can well be catered to. At the end of the day, public perceptions play an important role in affecting policy changes. Without the public support, it is not easy to carry out effective management.
The author is Dean School of Business at Hang Seng Management College. The views expressed here are entirely his own.
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