People are always talking about some market failure or the other that allegedly justifies government intervention. I too have found a case of market failure – in the pesticide in cola issue.

No it is not what you are thinking. I’m talking about the irrational behaviour displayed by consumers. As Swaminathan Aiyar demonstrates(via Yazad), by CSE’s own data, Pepsi is way safer than milk, eggs, meat and other edible stuff. (To be very precise, what he demonstrates is that the actual pesticide content in Indian cola is much less than the Euro norm for the edible stuff just mentioned. Now unless you can make a case that all those edible stuff in India meet and exceed Euro norms by a wide margin, the statement that Pepsi in India is safer than milk, eggs and meat in India holds)

But faced with the fact that their water, milk and eggs are contaminated, customers are boycotting Pepsi. Isn’t that irrational?

Actually, the last statement is not quite accurate, because consumers were not told all these. As Swaminathan Aiyar says, CSE did some clever marketing. They keep saying sotto voce that their aim in carrying out the study was to focus on the water quality, but apparently they worked out that targetting the cola companies would carry more impact than talking about water, milk, eggs etc.

But still, why is that so? I mean, why did CSE take up this particular marketing pitch? Faced with a choice between saying “Your milk, eggs and vegetables are contaminated with pesticides!” and “Your soft drinks contain pesticides!” they calculated that the latter would carry higher impact. Surely this tells us a lot about the irrationality of customers? Faced with a choice between worrying about an issue that concerns their health and an opportunity to bash up MNCs, CSE thought that the people would choose the latter, and they seem to be right.

I think this is a clear case of Market Failure. But I am not calling for government intervention to force the people to buy cola. I just want to understand the consumer’s mind.

I don’t think this irrationality comes about just because of a dislike for MNCs. In my view, there is another explanation. Pepsi and Coke are “fun”.Things like milk and vegetables are necessities When it comes to the latter, people are perfectly capable of being rational. They won’t stop drinking milk just because it is somewhat contaminated. They are capable of taking calculated risks. But they don’t want to take any risk when they are doing something they think of as enjoyable (and frivolous, hence something they ca? do without). They don’t even like to be reminded of the danger. This dual mode of thinking leads to a perverse result – Pepsi and Coke are subject to a higher standard than miilk, eggs and vegetables though the latter are consumed much more often than the former.

That brings me to this article Ramnath wanted me to look at. It essentially argues that the cola companies mishandled the issue; they should have taken problem head on by admitting guilt and stopping marketing soft drinks till they were thoroughly tested and Euro-level standards were introduced. This would have built “trust and goodwill” among the consumers.

Sorry, but I don’t think so. I am not talking of the ethics of doing this, but business-wise, this would have been a bad decision. If I am right about my claim that customers don’t want to think too deeply about fun stuff, then taking such action would not lead to goodwill. It will simply remind people of pesticides. (“I don’t have soft drinks any more. They had some problem with pesticides because of which they had to withdraw from the market for months. They claim they’ve fixed it, but who knows and who cares?” )

The cola executives best hope is that the issue will blow over, and pesticides move from the front of their consumers’ minds to the back.

I don’t like this. As I have pointed out, this is a clear case of market failure. I would have preferred it if the cola companies tackle the issue the same way as I (or Swami Aiyar) have done – by pointing out facts, figures and logic. But I understand why they don’t do that.

(This will also explain why Pepsi and Coke don’t compete with each other on pesticidefree-ness. If Pepsi says “Drink Pepsi because Pepsi has 70% lower pesticide content than Coke” or some such thing, chances are, customers will desert not just Coke, but also Pepsi.)