By Boz

There was the sound of breaking china from the adjacent cabin. I realized with a sigh that Mrs. Fricker, who had her ear to the keyhole, had dropped her tea cup. ‘Saul recommended you, saying that you knew the market well, but I see that the shit led me on’, she added. ‘The shit certainly did’, I replied through gritted teeth, feeling sorry I hadn’t ordered Almas Beluga Caviar at Saul’s lunch at the Savoy.

Fiona then asked me if I would still consider taking up the assignment, since she had come up before a cul de sac. A stray incident from one of my classes came to me, when a combative Greek student scornfully exclaimed that what LSE was teaching in microeconomics had no real world relevance. I decided at that moment to put this statement to test, and thus Fiona finally found herself a tutor.

For the remaining hour, Fiona and I discussed the methodology we would follow. A sample of the population of call girls and escorts in London was ruled out, and we finally agreed that she tell her story, if not chronologically, at least in order of importance. I would then try and fit the ideas to some known market behaviour or micro model. If more details were needed, Fiona would do her best to fill up the details and we would tweak the micro framework to mimic the reality.

‘What if any of your experiences of specific markets runs exactly counter to established Microeconomic theory?’, I asked nervously. Fiona was unfazed. ‘Well if it’s a toss-up between the oldest profession in the world and the newest social science, still fighting hard for its claims to be considered a Science, the oldest profession wins…easy peasy. Or, we can come up with a counter theory proving the conventional theory wrong, and, mind you, you might just get the Nobel.’ And that was that.

In the ensuing month, we progressed at a fast clip. Much of it was a learning process for me. From Fiona’s initial stories, it was clear that prostitution was an industry that was strongly governed by market fundamentals. There was a strong correlation between streetwalking and other crimes like drug trafficking. Markets were clearly differentiated not only by ‘product quality’, but also by geographical boundaries that were time honoured.

The ‘product’, so to speak, was sharply differentiated by quality and price parameters. At the lower end of the spectrum, the market for ‘hustlers’ and ‘streetwalkers’ was highly price sensitive and competitive, whereas, at the upper end – Fiona’s end – demand was relatively inelastic to price, and ‘quality’ carried a premium that the ‘Johns’ were willing to pay for. Arbitrage between these two markets was almost unknown. Not all, but most of the streetwalkers, were attached to a pimp, though, at the high-end, few of the escorts had ‘Managers’. The choice in opting for a pimp-led model was something we promised to look into.

From here, we passed on to the effects of ‘government regulations’ versus pure laissez faire. Fiona’s story ended by recounting the market disruption that had been caused by the collapse of the Iron Curtain, and the flooding of London by Ukrainian, Georgian, Latvian and other competitors. We wondered what we could say by way of ease of market entry and deterrence, and oligopolistic behaviour at the upper spectrum of the market through the Stackelberg and Bertrand models.

One of the first behaviour traits that we tried to put into a microeconomic framework was the tendency for streetwalkers to congregate at certain spots, instead of fanning themselves out over a wider catchment area. This phenomenon held true for posh Districts like Soho or Chelsea, as much as it did for the poorer Districts like the East End and Elephant and Castle. Mind you, we were looking at the behaviour of the highly competitive lower end where the ‘product’ could not be differentiated on quality. We first tried to explain the phenomenon by the theory of ‘search costs’ but soon realised that the explanation was incomplete. We finally arrived at Hotelling’s famous case of ice cream sellers.

Imagine a kilometre-long beach with swimmers and beach-goers evenly distributed along its length, with two ice cream sellers, Albert and Joe, at each end of the stretch selling a similar brand of ice-cream. It is easy to imagine that customers to the left of B the halfway point at 500m would go to Al, while those to the right of B will visit Joe’s cart. Both Joe and Al will have a 50% market share and in a cooperative game.

fanny 1

In a non-cooperative game, however, this is not an equilibrium. Consider what happens if Al decides to move 200 meters to the right:

fanny 1

We can reasonably expect that all customers to the left of Al, or 20% of customers, will patronise him while half of the remaining customers to his right would visit him and the other half go to Joe. Thus Al would enjoy a 60% market share and Joe, 40%.  However, Joe can retaliate by moving 400 meters to his right, and this game can go on till both Al and Joe are on top of each other at the 500m mark. None of them will have any incentive to move from here. This is the classic concept of a Nash equilibrium and it holds regardless of the number of players involved.

fanny 2

So, what holds for Al and Joe, two ice cream sellers along a stretch of Brighton beach, also holds for Roxanne, Susanne, Eunice and Jessica, replete in their high heels, faux leopard skin miniskirts, and languid cigarettes in holders, hustling the Soho area at night. Grim when human endeavour is equated to Häagen-Dazs ice cream, but then economics is a pretty grim science.

The upper end of the market, Fiona assured me, was extremely quality conscious, and competition was based on quality, rather than on locations or prices. It was also marked by high sunk costs and fixed costs. A high-end escort has to invest heavily in some remarkable things. First, of course, was basic training in what a high end consumer might be interested in (other than sex, that is), and this could include knowledge of French or some foreign language, or a perfect BBC diction, both of which involve long and expensive courses. A reasonable knowledge of gourmet food, wine, recreational drugs would always enhance ‘value’, as would nodding familiarity with international politics and domestic affairs. These are all ‘sunk’ costs. Added to these are fixed costs of rentals, ‘insurance money’ to the area ‘dons’ and policemen, and a whole host of intermediaries between the customer and the escort. Here, we were considering escorts who operated solo rather than under the banner of a Cat House. Perhaps the highest item of fixed cost is related to healthcare. To supplement the horrid services of Britain’s NHS, it was mandatory to purchase health insurance cover, which, for a trade like this, was exorbitantly priced.

What was common in the pricing decisions in all segments of the market was the high degree of risk aversion of the service provider. Fiona explained the premium charged over a certain ‘base price’ depended not only on the degree of risk (of some physical injury or contacting a STD) but that, certain types of customers, such as Stabs, were perceived as more risky.

Depicting this is fairly easy.

fanny 3

We have the risk-return function of two hookers, Lizzie and Susan. For the sake of simplicity, we have assumed here that risk is measurable cardinal number (in reality, risk is always expressed in terms of probability). Return, here, signifies the minimum amount of compensation, in pounds sterling, either girl would insist for performing a risky act.

Consider, first, a relatively safe sex act, say a hand job, where the chance of contracting AIDS is negligible, say, 5%. Both Lizzie and Susan, may feel that £50 would be the rate they could live with. Now consider a fairly risky act, sex without using condoms with a sailor on shore leave. The perception is that the risk of contracting AIDS is almost 30%. Lizzie is risk neutral. Her risk-return or Risk Utility is a straight line OP. For the 30% risk event, Lizzie is satisfied by a return of £80, while for Susan, she would offer this service only if the return is more than £250. Lastly, consider an extremely risky act with a 50% perception to cause AIDS. You can see that Lizzie, because she is risk neutral, is willing to perform this act for £130, whereas Susan will never do it, whatever the returns offered. Fiona assured me that most women in the trade had a risk averse profile similar to Susan’s.

Though our common tryst with economics was progressing well, Fiona maintained a formal distance on most personal matters. I guessed she was from the Midlands from her rare slips into a broad Yorkshire accent whenever she was angry; I learnt from her that she had taken three A-levels and had a degree in Economics from the Open University of East Anglia. She hinted at the fact that she had invested well, mainly from participating in the offers for sale of UK utilities by Mrs. Thatcher. In the current year, she was on a total sabbatical from the trade. Fiona was also fairly clear that at twenty seven she was a tad too old for the trade. She intended to avail of the Placement Fair, around Easter, and aim for a job in the City.

 Fiona had the foresight to understand that a one-year hiatus from the pinnacle of the escort business was too long, and that it would again entail a dog-eat-dog fight to clamber up the league rankings. She told me that she didn’t have the stomach to go through it again. She also confessed that the life of an escort girl on her own was a very lonely one. She couldn’t afford to be friends with her clients, nor continue with her erstwhile friends at school. Despite the money being good, what an escort craved for most was social acceptance, genuine companionship, and recognition.

This is the second part of the short story series, The Adventures of Fanny Hill at The London School of Economics.

Note: This story is purely a work of fiction. Though some of the personae peripheral to the story (such as Professors Desai and Goodhart exist), the main protagonists are fictional. Any resemblance to known figures is purely coincidental

bozBoz is the nom de plume of a retired IAS Officer with experience in Finance. He was at the IMF and possesses a PhD in Economics from the London School of Economics.

[1] [1] Fanny Hill-Memoirs of a Woman of Pleasure: an erotic novel written by John Cleland and first published in 1748

[2] [2] Harold Hotelling- ‘Stability in competition’: Economic Journal 1929

[3] [3]Non Cooperative Game Theory was the seminal contribution of John Forbes Nash.’ A course in Microeconomic Theory’ by David Kreps best explains the use of Game Theory in a wide range of economics

Read the third part here: The Adventures of Fanny Hill at the London School of Economics – Part 3


Posted by The Indian Economist