PRICING AND THE MACROECONOMY
Task 6.2 Researching prices and markets Conduct local research in one of the following areas
1 Air travel suppliers and prices.
2 Hotel accommodation suppliers and prices.
3 Restaurant suppliers and prices.
4 Package holiday suppliers and prices.
5 Cinema suppliers and prices.
6 Other leisure markets in your locality.
Your research should concentrate on a specific product or service (e.g.
return airfare from Auckland to New York) and identify the main sup- pliers, prices and product differences.
Recap Questions
1 Identify the market conditions which operate in your chosen market.
2 Account for the patterns of pricing which emerge from your research.
3 To what extent and why does your chosen market deviate from the model of perfect competition?
4 Is there any evidence of price discrimination or price leadership in your chosen market?
If so, explain the reasons and consequences.
If not, explain the reasons and consequences.
5 Compare and contrast your results with those of obtained in a different market.
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Market structure and pricingData Questions
Task 6.3 Journal article: Shaw, S., Lu, F., Chen, J., Zhou, C., 2009. China’s airline consolidation and its effects on domestic airline networks and competition. Journal of Transport Geography 17 (4), 293–305.
In this article the authors reflect on the fact that there has been fast growth and major reforms in the past three decades in air trans- portation in China. They note China’s transformation from a centrally planned economy to a market economy and suggest that an interesting question is whether experience in China is similar to the experiences of airline industry liberalization that have occurred in other countries.
Shaw et al. point to the United States Airline Deregulation Act in 1978 as a key catalyst towards a more global movement towards liberaliza- tion of airlines.
The article outlines four significant phases of development in civil avi- ation following the founding of the People’s Republic of China in 1949:
l The first phase identified is that of 1949–1978 which was a period of a carefully regulated environment. The Civil Aviation Administration of China (CAAC) was set up under military control. Control extended to all aspects of aviation including fares, schedules, routes market entry and exit. This was a period of no market competition.
l The second phase identified is that of 1978–1987 with the introduction of economic reforms. Here a key aim was to move the air transport sector towards profit-seeking goals. Importantly here the military was removed from control of the CAAC in 1980 but the CAAC continued in it regulatory role for the air transport industry. However, in 1985 private sector airlines were allowed to enter the market.
l The third phase spans the period 1987–2002. In 1987 the
administrative and the operational roles of the CAAC were separated and between 1987 and 1991 six state-owned airlines (Air China, China Eastern Airlines, China Southern Airlines, China Southwest Airlines, China Northwest Airlines and China Northern Airlines) were established and encouraged to make and retain profits.
l The fourth phase commenced in 2002 and heralded a period of CAAC-led airline consolidation. Three major airline groups were formed around Air China, China Eastern Airlines and China Southern Airlines.
The article concludes that China employed a reform programme in which the state remains a strong influence on the airline industry. This, it is noted, was different from the free market liberalization approach implemented in the USA. Of particular note is that the CAAC pursued a goal of creating three major airlines of roughly equal size and tried to orchestrate minimal direct competition between them. In contrast, air- line deregulation in the USA followed a strong free market philosophy with minimal state intervention and maximum competition.
Recap Questions
1 What kind of market type for airlines is evident:
(a) In China and how has the market changed?
(b) In the country in which you are studying?
2 Are airlines price makers or price takers? Use diagrams to explain your answers.
Data Questions
MULTIPLE CHOICE
1 The demand curve for a firm under perfect competition is as follows:
(a) Perfectly inelastic.
(b) Upward sloping.
(c) Perfectly elastic.
(d) Of unit elasticity.
2 The kinked demand curve is a typical feature of the following:
(a) Public sector markets.
(b) Oligopoly.
(c) Perfect competition.
(d) Monopoly.
3 Which of the following is not a feature of perfect competition?
(a) Barriers to entry for firms.
(b) Perfect knowledge of products.
(c) Identical products.
(d) Many sellers.
4 Which of the following is found under monopolistic competition but not under perfect competition?
(a) Product differentiation.
(b) Many buyers.
(c) Freedom of entry for firms.
(d) Many sellers.
5 Which of the following is not true?
(a) Under price discrimination firms are able to increase their revenue in comparison to charging a single price.
(b) Yield management systems charge differing prices according to predicted demand levels.
(c) An oligopoly is a market dominated by a few large firms.
(d) A private sector monopoly will operate break-even pricing.
3 What are the likely consequences of each of the four phases described in the article for fares and service quality?
4 Distinguish between oligopoly, monopoly and competition using examples from the global airline industry.
5 Investigate recent merger activity amongst major airlines: How is market structure and pricing affected by this?
6 On what basis do airlines set fares?
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Market structure and pricingREVIEW QUESTIONS
1 What kind of market structures do the following operate in:
(a) Package tour operators?
(b) London five-star hotels?
(c) Destinations?
(d) McDonalds?
2 Explain the elasticity of demand of a kinked demand curve.
3 Why will a monopolist choose not to produce in the inelastic range of its demand curve?
4 Why are there so few examples of perfectly competitive markets?
5 Under what circumstances is price leadership likely to lead to increased profits?
Websites of interest
British Airways: www.ba.com Amazon: www.amazon.com
Accor Hospitality: www.accorhotels.com Virgin Blue: www.virginblue.com.au Ryanair: www.ryanair.com
P&O Ferries: www.poferries.com Eurotunnel: www.eurotunnel.com Air China: www.airchina.com
China Eastern Airlines: www.flychinaeastern.com
C H A P T E R
PART 3 Markets in Practice
© 2011 Elsevier Ltd. All rights reserved.
Market intervention
7
Producers and consumers
Private
costs Private
benefits
Output
Public
costs Public
benefits
Government and society
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Market interventionObjectives and learning outcomes
The price mechanism as described in Chapter 3 seems to offer a simple yet effective system of signalling consumer demands to producers. It is often contrasted with systems of state planning – particularly as practised in former communist Eastern Europe. Many commentators noted that the Berlin Wall was built to stop people escaping from Eastern Europe to Western Europe, not the other way round. The economic landscape of Eastern Europe was characterized by queues for goods and services, empty shops, shoddy goods and service sector workers who exhibited indifference to their customers. For example, Burns (1998) discusses some of the problems associated with developing a modern tourism industry in Romania. He finds that the main problem confronting tourism is the lack of a market ethos, and a prevailing view that service is demeaning to the server and concludes that a new customer-focussed service sector needs to be developed. Free market economies, on the other hand, boast shops full of attractive consumer goods, few queues and a world of slick advertising and attention to service quality.
However, critical analysis of the market mechanism raises issues of concern. Sex tourists signal an effective demand for prostitution which suppliers satisfy for profit as demonstrated in Exhibit 7.1. Similarly, the demand for snuff, and child pornography videos, and for addictive drugs is met by the operation of market forces. The market has also created the tower blocks of Benidorm.
The objectives of this chapter are first to examine whether leisure and tourism provision should be left to the free market, and second to consider reasons for, and forms of, market intervention.
By studying this chapter, students will be able to:
l evaluate the benefits of the free market;
l evaluate the problems of the free market;
l understand the methods of market intervention;
l justify market intervention;
l understand recent developments in public sector provision.
Exhibit 7.1 Brazil is overtaking Thailand as sex tourism destination A BBC documentary has recently focussed on the growing problem of sex tourism in Brazil. The documentary reports on the particular issue of child prostitution. Its presenter explains how he encountered groups of young girls on the street corners of Recife and how one girl appearing to be about 13 years of age approached him and offered him sex for US$5. Another young girl, also about 13 years of age, tells him how she generally has more than 10 clients a night each paying her 10 reais for her services. The programme cites UNICEF data that estimates that there are around 250,000 child prostitutes in Brazil.
The rise in child prostitution is fuelled by a number of factors. On the demand side the British charity Happy Child International reports on