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
Summary
Review questions
Problem solving
Bibliography
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
Summary
Review questions
Problem solving
Bibliography
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"
Summary
Problem solving
Bibliography
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
Summary
Review questions
Problem solving
Bibliography
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
Summary
Review questions
Problem solving
Bibliography
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
Summary
Review questions
Problem solving
Bibliography
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
Summary
Problem solving
Bibliography
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
Summary
Review questions
Problem solving
Bibliography
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
Summary
Review questions
Problem solving
Bibliography
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
Summary
Review questions
Problem solving
Bibliography
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
Summary
Problem solving
Bibliography
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
Summary
Review questions
Problem solving
Bibliography
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
Summary
Problem solving
Bibliography
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
Summary
Review questions
Problem solving
Bibliography
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
Summary
Problem solving
Bibliography
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
Summary
Review questions
Problem solving
Bibliography
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
Summary
Review questions
Problem solving
Bibliography
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
Summary
Problem solving
Bibliography
Biography
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.
