1st Edition

Economics of Tourism and Hospitality A Micro Approach

By Yong Chen Copyright 2021
    414 Pages 191 Color Illustrations
    by Routledge

    414 Pages 191 Color Illustrations
    by Routledge

    This book offers students an accessible and applied introduction to microeconomics in tourism and hospitality through a comprehensive analysis of the market mechanism, demand and supply, firm behavior and strategy, and transaction and institution.

    This book not only helps students to master core microeconomic theories that are essential for understanding the tourism and hospitality industry, but, more importantly, it guides students to analyze consumer behavior and firm strategy specific to the industry. Throughout the book, readers are guided to develop the economic analysis of tourism and hospitality that progresses from economic intuition to graphical representation and to mathematical quantification. Carefully corralled case studies showcase the applications of key microeconomic theories in solving a wide range of real-world problems, including Uber’s surge pricing, Airbnb’s supply adjustment, and McDonald’s and Burger King vying for prime locations. This book is written in an accessible style, illustrated with exquisite diagrams, and enriched with a range of other features, such as chapter summaries, review questions, and further readings to aid readers’ further understanding.

    By reading this book, students will be able to develop an economist’s way of thinking, which will enable them to analyze tourism and hospitality businesses in a rigorous and critical manner. This book is essential reading for all tourism and hospitality students and teachers.

    MODULE 1 The market

    1 Economic approach to tourism and hospitality

    1.1 Tourism and hospitality

    1.1.1 The making of modern tourism

    1.1.2 The essence of hospitality

    1.1.3 Tourism versus hospitality

    1.2 Breadth and depth of tourism and hospitality

    1.2.1 Breadth of the tourism industry

    1.2.2 Depth of the tourism industry

    1.2.3 Supply expansion in tourism and hospitality

    1.3 The tourist and the tourist economy

    1.3.1 Tourism and the tourist

    1.3.2 Tourism consumption

    1.3.3 Global tourism growth and distribution

    1.4 Economic significance of tourism


    Review questions

    Problem solving


    2 Demand, supply, and the market

    2.1 Economic thinking

    2.2 Equilibrium analysis

    2.2.1 Laws of demand and supply

    2.2.2 Market equilibrium

    2.2.3 Demand and supply versus quantity demanded and supplied

    2.3 Economic surplus and market efficiency

    2.3.1 Consumer surplus, producer surplus, and social surplus

    2.3.2 Price controls and deadweight loss

    2.3.3 Market efficiency

    2.4 Determinants of demand and supply

    2.4.1 Push factors versus pull factors

    2.4.2 Demand drives supply

    2.4.3 Supply creates demand


    Review questions

    Problem solving


    3 Uber’s surge pricing and market efficiency

    3.1 What is a surge in demand?

    3.2 How does surge pricing work?

    3.2.1 Riders, drivers, and surge multipliers

    3.2.2 Surge pricing works

    3.2.3 Surge pricing fails

    3.3 Welfare analysis of surge pricing

    3.3.1 Economic surplus

    3.3.2 Empirical evidence

    3.4 Information, price signal, and market efficiency

    3.4.1 Surge multiplier as the price signal

    3.4.2 "The use of knowledge in society"


    Problem solving


    MODULE 2 Demand

    4 Consumer choice and demand

    4.1 The economic problem

    4.2 Utility, preference, and indifference curve

    4.2.1 Utility and diminishing marginal utility

    4.2.2 Consumption bundle and preference relation

    4.2.3 Indifference curve

    4.3 Budget constraint and consumer optimization

    4.3.1 Budget line

    4.3.2 Consumer optimization

    4.3.3 Equalization of marginal utility per dollar

    4.4 Derivation of the demand curve

    4.4.1 Consumer optimization and the demand curve

    4.4.2 Properties of the demand curve

    4.4.3 Demand functions

    4.5 The work・leisure tradeoff

    4.5.1 Substitution effect

    4.5.2 Income effect

    4.5.3 Opportunity cost of leisure


    Review questions

    Problem solving


    5 Elasticity of consumer demand

    5.1 The responsiveness of demand

    5.2 Defining and calculating elasticity

    5.2.1 Arc elasticity

    5.2.2 Midpoint elasticity

    5.2.3 Point elasticity

    5.3 Interpretation of elasticity

    5.3.1 Nature of the effect

    5.3.2 Magnitude of the effect

    5.4 Major elasticities of demand

    5.4.1 Price elasticity of demand

    5.4.2 Income elasticity of demand

    5.4.3 Cross-price elasticity of demand

    5.5 Price elasticity and firm revenue

    5.5.1 Price elasticity of linear demand

    5.5.2 Price elasticity and firm revenue


    Review questions

    Problem solving


    6 Network effects in market demand

    6.1 Individual demand versus market demand

    6.1.1 Additivity in market demand

    6.1.2 Demand interdependence and non-additivity

    6.1.3 Network externality and network effects

    6.2 Network effects and market demand

    6.2.1 Bandwagon effect

    6.2.2 Snob effect

    6.2.3 Veblen effect

    6.3 Nonfunctional demand and utility

    6.3.1 Functional demand versus nonfunctional demand

    6.3.2 Functional utility versus nonfunctional utility

    6.4 Consumer belief and information cues


    Review questions

    Problem solving


    7 Demand for Pinot Noir versus Merlot: The Sideways effect

    7.1 Sideways and the wines

    7.2 Sideways on wine consumption

    7.2.1 Standardization and comparisons

    7.2.2 The Sideways effect on quantity

    7.2.3 The Sideways effect on price

    7.3 Decomposing price and the Sideways effect

    7.3.1 Change in price or quantity

    7.3.2 Changes in both price and quantity

    7.4 Consumer knowledge and the Sideways effect

    7.4.1 Consumer knowledge and wine consumption

    7.4.2 Heterogeneity of the Sideways effect


    Problem solving


    MODULE 3 Supply

    8 Firm production and cost

    8.1 Production function

    8.1.1 Capital and labor

    8.1.2 Diminishing marginal product

    8.2 Derivation of cost curves

    8.2.1 Cost structure

    8.2.2 Cost concepts

    8.2.3 Cost curves

    8.3 Cost and short-run production

    8.3.1 Revenue, cost, and profit

    8.3.2 Breakeven point

    8.3.3 Firm optimization

    8.4 Cost and long-run production

    8.4.1 Long-run average cost

    8.4.2 Economies of scale

    8.4.3 Why economies of scale arise


    Review questions

    Problem solving


    9 Competition and market structure

    9.1 Market structure in a nutshell

    9.1.1 What is market structure

    9.1.2 Market structures in tourism and hospitality

    9.2 Perfect competition

    9.2.1 Market demand versus firm demand

    9.2.2 Positive profit, zero profit, and shutdown

    9.2.3 Derivation of the supply curve

    9.3 Monopoly

    9.3.1 Downward-sloping demand curve

    9.3.2 Marginal revenue curve

    9.3.3 Output and price decision

    9.4 Monopolistic competition

    9.4.1 Product differentiation and demand

    9.4.2 Monopolistic competition in the long run

    9.5 Oligopoly

    9.5.1 Strategic competition

    9.5.2 Duopoly and Bertrand competition

    9.5.3 Market efficiency


    Review questions

    Problem solving


    10 Market concentration and market power

    10.1 Market definition and market boundary

    10.1.1 Market boundary by product

    10.1.2 Market boundary by location

    10.1.3 Market concentration and market power

    10.2 Measuring market concentration

    10.2.1 Four-firm concentration ratio

    10.2.2 Herfindahl-Hirschman Index

    10.2.3 Lorenz curve

    10.3 Measuring market power

    10.3.1 Lerner index and price elasticity of demand

    10.3.2 Lerner index and demand substitutability

    10.4 Industry versus sector

    10.4.1 The complementary nature of the tourism industry

    10.4.2 Market concentration in tourism and hospitality


    Review questions

    Problem solving


    11 Airbnb versus hotels in supply adjustment

    11.1 Performance metrics in the lodging industry

    11.1.1 Supply and demand

    11.1.2 Occupancy, ADR, and RevPAR

    11.2 Discrepancy in market performance

    11.2.1 Airbnb ADR and occupancy are stationary

    11.2.2 Airbnb ADR and occupancy are lower

    11.3 Demand seasonality and supply adjustment

    11.3.1 Supply adjustment

    11.3.2 Demand seasonality and market equilibrium

    11.3.3 Cost and host behavior of Airbnb

    11.4 Competition in the lodging industry


    Problem solving


    MODULE 4 Firm behavior and strategy

    12 Monopoly and price discrimination

    12.1 Price discrimination versus uniform pricing

    12.1.1 Uniform pricing of a monopolist

    12.1.2 What is price discrimination

    12.2 Third-degree price discrimination

    12.2.1 Demand heterogeneity by consumer segment

    12.2.2 Pricing on consumer segments

    12.2.3 Discontinuity in market demand

    12.3 Second-degree price discrimination

    12.3.1 Block selling and diminishing marginal utility

    12.3.2 Pricing on sale blocks

    12.3.3 Welfare analysis

    12.4 First-degree price discrimination

    12.4.1 Pricing on individuals

    12.4.2 Social optimum and market efficiency

    12.4.3 An example of first-degree price discrimination

    12.5 Market imperfection, information, and price discrimination

    12.5.1 Price discrimination and market efficiency

    12.5.2 Information acquisition about demand

    12.5.3 Economic discrimination versus social discrimination


    Review questions

    Problem solving


    13 Starbucks pricing: Tall, Grande, and Venti

    13.1 Receptacle size and price tag

    13.2 Second-degree price discrimination

    13.2.1 How does it work?

    13.2.2 Why the Tall is the optimal single size

    13.2.3 Optimal sizes and prices for Grande and Venti

    13.3 Third-degree price discrimination

    13.3.1 How does it work?

    13.3.2 Nonfunctional utility and elasticity of demand

    13.3.3 Elasticity of demand across sizes

    13.4 Rationality versus irrationality


    Problem solving


    14 Duopoly and product differentiation

    14.1 Horizontal versus vertical product differentiation

    14.2 Minimum product differentiation

    14.2.1 Assumptions of the model

    14.2.2 Location choice and price competition

    14.2.3 Law of minimum product differentiation

    14.3 Maximum product differentiation

    14.3.1 What is maximum product differentiation?

    14.3.2 Equilibrium price in maximum product differentiation

    14.3.3 Sources of firm profit

    14.4 Consumer preference and product differentiation

    14.4.1 Dispersion of consumer preference

    14.4.2 Intensity of consumer preference

    14.4.3 Product differentiation beyond location

    14.5 Product differentiation and market efficiency


    Review questions

    Problem solving


    15 McDonald’s versus Burger King in product differentiation

    15.1 Firms in the fast food industry

    15.2 Location affecting price and profit

    15.2.1 McDonald’s price and profit

    15.2.2 Burger King’s price and profit

    15.2.3 McDonald’s versus Burger King in pricing

    15.3 Competition and location choice

    15.3.1 McDonald’s responds to Burger King’s location

    15.3.2 Burger King responds to McDonald’s location

    15.4 What affects location equilibrium

    15.4.1 Firm asymmetry and location choice

    15.4.2 Market size, the "center," and location choice


    Problem solving


    MODULE 5 Transaction and Institution

    16 Intermediation and the bid-ask spread

    16.1 Transaction costs and the firm

    16.1.1 Walrasian auction and transaction costs

    16.1.2 The firm and the intermediary

    16.2 Bilateral search versus intermediation

    16.2.1 Buyers and sellers

    16.2.2 Bilateral search

    16.2.3 Intermediation

    16.3 Determining the bid-ask spread

    16.3.1 Search costs and intermediary profit

    16.3.2 Bid-ask spread without search

    16.3.3 Bid-ask spread with search

    16.4 Intermediation versus disintermediation

    16.4.1 The emergence of intermediaries

    16.4.2 Disintermediation


    Review questions

    Problem solving


    17 The two-sided market and price structure

    17.1 Externality and the platform

    17.1.1 A descriptive framework

    17.1.2 Cross-side network externality

    17.2 What makes a two-sided market?

    17.2.1 The implicit market for interactions

    17.2.2 Demands for the platform

    17.2.3 Defining two-sidedness

    17.3 Price decision of the platform

    17.3.1 Profit maximization

    17.3.2 Implicit price of interactions

    17.3.3 Price structure on two sides

    17.4 The Coase theorem and platformization

    17.4.1 The failure of the Coase theorem

    17.4.2 Internalization of externality


    Review questions

    Problem solving


    18 The platformization of OpenTable

    18.1 What is OpenTable?

    18.2 OpenTable as a platform

    18.2.1 The platform

    18.2.2 Cross-side network effects

    18.2.3 Same-side network effects

    18.3 Structure of fees and user response

    18.3.1 Structure of fees

    18.3.2 Restaurants’ response

    18.3.3 Diners’ response

    18.4 Firm revenue and growth

    18.5 Platform competition and multi-homing


    Problem solving



    Yong Chen, Ph.D., is an Associate Professor at Ecole hoteliere de Lausanne (EHL), Switzerland, where he lectures on economics of tourism and hospitality. Prior to joining EHL in 2014, he was a Postdoctoral Fellow in the School of Hotel and Tourism Management at The Hong Kong Polytechnic University, where he also obtained his Ph.D. in 2012. Dr. Chen’s research interests include tourist behavior, tourism demand, the sharing economy, and Chinese outbound tourism. Dr. Chen’s research has been published in a diverse range of reputable journals and his opinions have also appeared in CNN, CGTN, South China Morning Post, Sixth Tone, and EHL Hospitality Insights.

    ‘This book represents a massive step forward in the understanding and teaching of tourism economics, being a pioneer in entirely focussing on the microeconomics behind tourism and hospitality. Students, teachers, and practitioners would appreciate the author’s ability in effectively explaining real-world phenomena with rigorous theoretical analysis. It is a fascinating narrative of tourism and hospitality through the austere language of economics.’

    Paolo Figini, Associate Professor of Economics, University of Bologna, Italy

    ‘This book is a timely addition to the existing economics texts. The author has taken a balanced approach in integrating economic theories with tourism and hospitality practices. The coverage of the book is comprehensive and the contents are easily accessible by both undergraduate and postgraduate students studying tourism and hospitality programs. The book is also a very useful reference for academics who have research interests in tourist and firm behaviors.’

    Haiyan Song, Professor of Tourism, The Hong Kong Polytechnic University, Hong Kong, China

    ‘Professor Chen presents an insightful integration of modern microeconomic theory and the competitive dynamics of the tourism and hospitality industry. His analysis of the prevailing models and explanations are expertly framed and explicated using examples from a wide-array of industry segments and settings, and he contextualizes the implications in a cogent, comprehensive, and accessible manner that will appeal to students, scholars, and practitioners alike.’

    J. Bruce Tracey, Professor of Management, Cornell University, United States

    'This book well introduces a theoretic overview of microeconomics and provides practical applications to the tourism and hospitality industries. This is a unique reference for students and industry practitioners in tourism and hospitality who are seeking an insight into rapidly changing global markets and customer behaviors. This book is clearly the top of my recommended reading list.'  

    SooCheong (Shawn) Jang, Ph.D., Professor of Hospitality and Tourism Management, Purdue University, USA.