Table of Contents
List of figures xv
List of tables xix
List of acronyms xx
List of symbols xxii
Preface xxiii
Instruction to readers xxv
Acknowledgments xxvii
Module 1 The market 1
1 Economic approach to tourism and hospitality 3
1.1 Tourism and hospitality 3
1.1.1 The making of modern tourism 3
1.1.2 The essence of hospitality 5
1.1.3 Tourism versus hospitality 6
1.2 Breadth and depth of tourism and hospitality 6
1.2.1 Breadth of the tourism industry 8
1.2.2 Depth of the tourism industry 8
1.2.3 Supply expansion in tourism and hospitality 9
1.3 The tourist and the tourist economy 10
1.3.1 Tourism and the tourist 10
1.3.2 Tourism consumption 13
1.3.3 Global tourism growth and distribution 15
1.4 Economic significance of tourism 17
Summary 20
Review questions 21
Problem solving 22
Bibliography 23
2 Demand, supply, and the market 24
2.1 Economic thinking 24
2.2 Equilibrium analysis 26
2.2.1 Laws of demand and supply 26
2.2.2 Market equilibrium 28
2.2.3 Demand and supply versus quantity demanded and supplied 29
2.3 Economic surplus and market efficiency 31
2.3.1 Consumer surplus, producer surplus, and social surplus 31
2.3.2 Price controls and deadweight loss 32
2.3.3 Market efficiency 34
2.4 Determinants of demand and supply 34
2.4.1 Push factors versus pull factors 34
2.4.2 Demand drives supply 37
2.4.3 Supply creates demand 40
Summary 41
Review questions 42
Problem solving 45
Bibliography 47
3 Uber's surge pricing and market efficiency 48
3.1 What is a surge in demand? 48
3.2 How does surge pricing work? 49
3.2.1 Riders, drivers, and surge multipliers 49
3.2.2 Surge pricing works 50
3.2.3 Surge pricing fails 52
3.3 Welfare analysis of surge pricing 54
3.3.1 Economic surplus 54
3.3.2 Empirical evidence 56
3.4 Information, price signal, and market efficiency 57
3.4.1 Surge multiplier as the price signal 57
3.4.2 "The use of knowledge in society" 58
Summary 59
Problem solving 60
Bibliography 61
Module 2 Demand 63
4 Consumer choice and demand 65
4.1 The economic problem 65
4.2 Utility, preference, and indifference curve 67
4.2.1 Utility and diminishing marginal utility 67
4.2.2 Consumption bundle and preference relation 68
4.2.3 Indifference curve 69
4.3 Budget constraint and consumer optimization 72
4.3.1 Budget line 72
4.3.2 Consumer optimization 74
4.3.3 Equalization of marginal utility per dollar 75
4.4 Derivation of the demand curve 76
4.4.1 Consumer optimization and the demand curve 76
4.4.2 Properties of the demand curve 77
4.4.3 Demand functions 77
4.5 The work-leisure tradeoff 78
4.5.1 Substitution effect 78
4.5.2 Income effect 80
4.5.3 Opportunity cost of leisure 80
Summary 83
Review questions 84
Problem solving 87
Bibliography 89
5 Elasticity of consumer demand 90
5.1 The responsiveness of demand 90
5.2 Defining and calculating elasticity 92
5.2.1 Arc elasticity 93
5.2.2 Midpoint elasticity 95
5.2.3 Point elasticity 95
5.3 Interpretation of elasticity 97
5.3.1 Nature of the effect 97
5.3.2 Magnitude of the effect 97
5.4 Major elasticities of demand 98
5.4.1 Price elasticity of demand 99
5.4.2 Income elasticity of demand 100
5.4.3 Cross-price elasticity of demand 104
5.5 Price elasticity and firm revenue 106
5.5.1 Price elasticity of linear demand 106
5.5.2 Price elasticity and firm revenue 107
Summary 110
Review questions 111
Problem solving 113
Bibliography 115
6 Network effects in market demand 116
6.1 Individual demand versus market demand 116
6.1.1 Additivity in market demand 117
6.1.2 Demand interdependence and non-additivity 118
6.1.3 Network externality and network effects 120
6.2 Network effects and market demand 121
6.2.1 Bandwagon effect 121
6.2.2 Snob effect 123
6.2.3 Veblen effect 124
6.3 Nonfunctional demand and utility 128
6.3.1 Functional demand versus nonfunctional demand 128
6.3.2 Functional utility versus nonfunctional utility 129
6.4 Consumer belief and information cues 131
Summary 132
Review questions 133
Problem solving 136
Bibliography 137
7 Demand for Pinot Noir versus Merlot: The Sideways effect 138
7.1 Sideways and the wines 139
7.2 Sideways on wine consumption 140
7.2.1 Standardization and comparisons 140
7.2.2 The Sideways effect on quantity 141
7.2.3 The Sideways effect on price 142
7.3 Decomposing price and the Sideways effect 144
7.3.1 Change in price or quantity 144
7.3.2 Changes in both price and quantity 145
7.4 Consumer knowledge and the Sideways effect 147
7.4.1 Consumer knowledge and wine consumption 147
7.4.2 Heterogeneity of the Sideways effect 147
Summary 150
Problem solving 151
Bibliography 151
Module 3 Supply 153
8 Firm production and cost 155
8.1 Production function 155
8.1.1 Capital and labor 156
8.1.2 Diminishing marginal product 158
8.2 Derivation of cost curves 159
8.2.1 Cost structure 159
8.2.2 Cost concepts 160
8.2.3 Cost curves 162
8.3 Cost and short-run production 165
8.3.1 Revenue, cost, and profit 165
8.3.2 Breakeven point 166
8.3.3 Firm optimization 167
8.4 Cost and long-run production 167
8.4.1 Long-run average cost 167
8.4.2 Economies of scale 169
8.4.3 Why economies of scale arise 170
Summary 171
Review questions 172
Problem solving 175
Bibliography 177
9 Competition and market structure 178
9.1 Market structure in a nutshell 178
9.1.1 What is market structure 178
9.1.2 Market structures in tourism and hospitality 181
9.2 Perfect competition 181
9.2.1 Market demand versus firm demand 182
9.2.2 Positive profit, zero profit, and shutdown 183
9.2.3 Derivation of the supply curve 185
9.3 Monopoly 187
9.3.1 Downward-sloping demand curve 187
9.3.2 Marginal revenue curve 188
9.3.3 Output and price decision 189
9.4 Monopolistic competition 190
9.4.1 Product differentiation and demand 190
9.4.2 Monopolistic competition in the long run 192
9.5 Oligopoly 192
9.5.1 Strategic competition 192
9.5.2 Duopoly and Bertrand competition 193
9.5.3 Market efficiency 195
Summary 196
Review questions 197
Problem solving 200
Bibliography 202
10 Market concentration and market power 203
10.1 Market definition and market boundary 203
10.1.1 Market boundary by product 203
10.1.2 Market boundary by location 205
10.1.3 Market concentration and market power 205
10.2 Measuring market concentration 206
10.2.1 Four-firm concentration ratio 207
10.2.2 Herfindahl-Hirschman Index 209
10.2.3 Lorenz curve 211
10.3 Measuring market power 215
10.3.1 Lerner index and price elasticity of demand 215
10.3.2 Lerner index and demand substitutability 216
10.4 Industry versus sector 218
10.4.1 The complementary nature of the tourism industry 218
10.4.2 Market concentration in tourism and hospitality 219
Summary 221
Review questions 222
Problem solving 224
Bibliography 226
11 Airbnb versus hotels in supply adjustment 227
11.1 Performance metrics in the lodging industry 227
11.1.1 Supply and demand 227
11.1.2 Occupancy, ADR, and RevPAR 229
11.2 Discrepancy in market performance 230
11.2.1 Airbnb ADR and occupancy are stationary 230
11.2.2 Airbnb ADR and occupancy are lower 231
11.3 Demand seasonality and supply adjustment 234
11.3.1 Supply adjustment 234
11.3.2 Demand seasonality and market equilibrium 237
11.3.3 Cost and host behavior of Airbnb 239
11.4 Competition in the lodging industry 240
Summary 241
Problem solving 242
Bibliography 244
Module 4 Firm behavior and strategy 245
12 Monopoly and price discrimination 247
12.1 Price discrimination versus uniform pricing 247
12.1.1 Uniform pricing of a monopolist 247
12.1.2 What is price discrimination 248
12.2 Third-degree price discrimination 249
12.2.1 Demand heterogeneity by consumer segment 249
12.2.2 Pricing on consumer segments 250
12.2.3 Discontinuity in market demand 253
12.3 Second-degree price discrimination 253
12.3.1 Block selling and diminishing marginal utility 253
12.3.2 Pricing on sale blocks 254
12.3.3 Welfare analysis 255
12.4 First-degree price discrimination 257
12.4.1 Pricing on individuals 257
12.4.2 Social optimum and market efficiency 258
12.4.3 An example of first-degree price discrimination 259
12.5 Market imperfection, information, and price discrimination 260
12.5.1 Price discrimination and market efficiency 260
12.5.2 Information acquisition about demand 261
12.5.3 Economic discrimination versus social discrimination 262
Summary 263
Review questions 264
Problem solving 267
Bibliography 269
13 Starbucks pricing: Tall, Grande, and Venti 270
13.1 Receptacle size and price tag 270
13.2 Second-degree price discrimination 272
13.2.1 How does it work? 272
13.2.2 Why the Tall is the optimal single size 275
13.2.3 Optimal sizes and prices for Grande and Venti 276
13.3 Third-degree price discrimination 278
13.3.1 How does it work? 278
13.3.2 Nonfunctional utility and elasticity of demand 279
13.3.3 Elasticity of demand across sizes 280
13.4 Rationality versus irrationality 282
Summary 282
Problem solving 283
Bibliography 284
14 Duopoly and product differentiation 285
14.1 Horizontal versus vertical product differentiation 285
14.2 Minimum product differentiation 287
14.2.1 Assumptions of the model 288
14.2.2 Location choice and price competition 289
14.2.3 Law of minimum product differentiation 291
14.3 Maximum product differentiation 291
14.3.1 What is maximum product differentiation? 291
14.3.2 Equilibrium price in maximum product differentiation 292
14.3.3 Sources of firm profit 296
14.4 Consumer preference and product differentiation 297
14.4.1 Dispersion of consumer preference 297
14.4.2 Intensity of consumer preference 298
14.4.3 Product differentiation beyond location 299
14.5 Product differentiation and market efficiency 300
Summary 301
Review questions 302
Problem solving 304
Bibliography 305
15 McDonald's versus Burger King in product differentiation 306
15.1 Firms in the fast food industry 306
15.2 Location affecting price and profit 309
15.2.1 McDonald's price and prop 309
15.2.2 Burger King's price and profit 310
15.2.3 McDonald's versus Burger King in pricing 311
15.3 Competition and location choice 313
15.3.1 McDonald's responds to Burger King's location 313
15.3.2 Burger King responds to McDonald's location 314
15.4 What affects location equilibrium 315
15.4.1 Firm asymmetry and location choice 315
15.4.2 Market size, the "center," and location choice 316
Summary 317
Problem solving 318
Bibliography 319
Module 5 Transaction and Institution 321
16 Intermediation and the bid-ask spread 323
16.1 Transaction costs and the firm 323
16.1.1 Walrasian auction and transaction costs 323
16.1.2 The firm and the intermediary 324
16.2 Bilateral search versus intermediation 326
16.2.1 Buyers and sellers 326
16.2.2 Bilateral search 327
16.2.3 Intermediation 328
16.3 Determining the bid-ask spread 329
16.3.1 Search costs and intermediary profit 329
16.3.2 Bid-ask spread without search 331
16.3.3 Bid-ask spread with search 333
16.4 Intermediation versus disintermediation 336
16.4.1 The emergence of intermediaries 336
16.4.2 Disintermediation 337
Summary 339
Review questions 340
Problem solving 341
Bibliography 343
17 The two-sided market and price structure 344
17.1 Externality and the platform 344
17.1.1 A descriptive framework 344
17.1.2 Cross-side network externality 346
17.2 What makes a two-sided market? 346
17.2.1 The implicit market for interactions 346
17.2.2 Demands for the platform 347
17.2.3 Defining two-sidedness 349
17.3 Price decision of the platform 350
17.3.1 Profit maximization 350
17.3.2 Implicit price of interactions 351
17.3.3 Price structure on two sides 352
17.4 The Coase theorem and platformization 356
17.4.1 The failure of the Coase theorem 356
17.4.2 Internalization of externality 357
Summary 358
Review questions 359
Problem solving 360
Bibliography 362
18 The platformization of OpenTable 364
18.1 What is OpenTable? 364
18.2 OpenTable as a platform 366
18.2.1 The platform 366
18.2.2 Cross-side network effects 366
18.2.3 Same-side network effects 367
18.3 Structure of fees and user response 368
18.3.1 Structure of fees 368
18.3.2 Restaurants' response 370
18.3.3 Diners' response 371
18.4 Firm revenue and growth 372
18.5 Platform competition and multi-homing 374
Summary 375
Problem solving 376
Bibliography 377
Author Index 379
Subject Index 380
