Friday, 31 January 2014

Are tourism operators in NZ missing a trick?

One of the things I noticed again while in Thailand last year was the pricing strategies of tourist attractions, like Wat Pho, Ayutthaya, and so on. At these tourist attractions, the locals pay a much lower entry fee than foreign tourists.

Of course, this is an example of price discrimination - where different consumers (or groups of consumers) are charged different prices for the same good or service, and where the difference in price does not arise because of a difference in cost. So, in this case there are two groups (foreigners and locals) paying different prices for the same thing (entry into Ayutthaya, or some other tourist attraction).

How can they get away with this? Well first, price discrimination is not illegal. If it were, then you couldn't haggle over any prices (and haggling is almost mandatory if you are shopping at the markets in Thailand and don't want to get ripped off!). Second, the seller needs some degree of market power - they need to be able to set the price. Since there are few substitutes for seeing Ayutthaya and there is only one supplier, that guarantees some market power here. Ok, so that's the basic market condition for price setting sorted.

For price discrimination to work though, you need to meet three conditions:
  1. Different groups of customers (a group could be made up of one individual) who have different price elasticities of demand (different sensitivity to price changes);
  2. You need to be able to deduce which customers belong to which groups (so that they get charged the correct price); and
  3. No transfers between the groups (since you don't want the low-price group re-selling to the high-price group).
Those conditions are generally met in the case of tourist attractions. Foreign tourists have low sensitivity to price (low price elasticity of demand) for a few reasons - there are few substitutes for visiting Ayutthaya (or other tourist attraction). Foreign tourists have usually also travelled a long way at great cost to get to Thailand, so the cost of entry into Ayutthaya is pretty small in the overall cost of their holiday. For these reasons, the foreign tourists are relatively insensitive to price and raising the price of entry isn't going to keep them away in great numbers.

On the other hand, locals have plenty of other activities they can do rather than visiting the tourist attraction (there are many substitutes), and the cost of entry is a large proportion of the total cost so is quite significant to them. So, locals tend to be more sensitive to price and raising the price of entry would deter them in greater numbers than foreign tourists.

Of course, it is relatively easy for the tourist operators to tell the foreigners from the locals (although I do wonder if Lao citizens, for instance, could sneak in by posing as locals). And from what I could tell, the tickets looked different for the locals from the foreigners and were checked on entry, so transfers between locals and foreign tourists didn't appear to be possible.

Now, having met those conditions and knowing that locals are more price sensitive than foreign tourists, it makes sense to charge the foreign tourists a higher price and locals a lower price. The foreigners won't be deterred by the high price, while the locals will come in greater numbers because of the low price for them. Voila! (I wonder what Thai for "voila" is?). Higher profits for the tourist operator, than if they set a single price for everyone.

Which brings me to my question. Why don't tourist operators in New Zealand make use of price discrimination? If I go to the Polynesian Spa in Rotorua for instance, there is one price that applies to everyone, not separate prices for locals and tourists. The conditions for these operators are the same for those in Thailand. Maybe they don't want to be seen to be price gouging tourists? Although that raises the question of why it is all right for the Thais to do it? Price discrimination could even be introduced by stealth [1] - instead of posting separate prices, you simply give a 10% (or whatever) discount to locals, while the 'regular' price (which turns out to only be paid by foreign tourists) is what is displayed. And being good to the locals makes for great press.

The only reason I can think of is a capacity issue. If your tourist attraction is capacity constrained, then lowering the price and attracting more locals might squeeze out some higher-paying foreign tourists. Having said that though, are there that many tourist attractions that are heavily capacity constrained?

Tourist operators in New Zealand may well be missing a trick. But at least they're not as bad as these failed attempts at price discrimination.

*****

[1] Though this is not as stealthy as some places in Thailand, where the price for foreigners is written in Arabic numerals, while the price for Thais is written in Thai language.

Sunday, 19 January 2014

The implications of rural-urban migration for children left behind

Back on New Years Day, Tyler Cowen at Marginal Revolution posted this "China fact of the day":
More than 61 million children — about one-fifth of the kids in China — live in villages without their parents. Most are the offspring of peasants who have flocked to cities in one of the largest migrations in human history. For three decades, the migrants’ cheap labor has fueled China’s rise as an economic juggernaut. But the city workers are so squeezed by high costs and long hours that many send their children to live with elderly relatives in the countryside.
The Washington Post article which inspired Tyler's post makes for sobering reading. But was no surprise to me. One of the first things I noticed during my PhD fieldwork in Northeast Thailand in 2003, was the number of children who were being raised by grandparents. Just like Beibei in the article.

Even worse, many of the grandparents that I spoke to related a similar story: The grandchild (or often grandchildren, since unlike China, Thailand didn't have a one child policy) are left with them while the parents go to work in Bangkok. The parents start off by visiting and bringing money with them, then after a couple of years this becomes sending money without visiting, and before long the remittances start to dry up. Eventually, the grandparents are left caring for the grandchildren without assistance from the parents at all. Now, of course this does not happen in all cases. But it was frequent enough of a story for me to refine my data collection on the fly to allow me to also partially investigate the question of whether these children were being made worse off.

The result was this working paper, co-authored with Steven Lim. In the paper, we look at how migration changes Lux's traditional domestic cycle, and how children are faring (in terms of anthropometric measures) in households of different types. We found that, relative to nuclear families (where both of the child's parents are present), children in other family types have significantly lower weight-for-height (with insignificant differences in weight-for-age or height-for-age). The implication is that children living without their parents have worse outcomes. Surprisingly though, the worst outcomes of all were for those children in extended families with both parents present. We put that result down to nutritional resources being spread among more dependents in those households.

Of course, this study was purely cross-sectional so we are limited in what we can say about causality. We couldn't even control for how long each child had been in their 'current' household type, which was a big limitation. I've been meaning to go back to similar research questions using some of the excellent panel data series that are available for developing countries, which might help to resolve the question of whether the type of household really matters.

Thursday, 9 January 2014

Let them have placebos!

I hope the New Year is treating you well. I had a fairly clean break from work, with many family commitments and work to do around the house. Anyway, now I'm back into it, and with a number of blog post ideas that have been germinated over the last two weeks. First up is the placebo effect.

In Dan Ariely's wonderful book Predictably Irrational, he devotes an entire chapter and more to the placebo effect. It works like this: because we are told enthusiastically that a particular medicine or procedure will help cure what ails us, our body reacts to make it so (at least, to some extent). Ariely lists a number of medical (and other) applications where the placebo effect has been shown to work.

On Christmas Day the Wall Street Journal published this article, reporting on a Finnish study (gated) that demonstrates that the positive effects of a type of arthroscopic knee surgery (specifically, partial meniscectomy) are a placebo effect. The study reported:
In the intention-to-treat analysis, there were no significant between-group differences in the change from baseline to 12 months in any primary outcome... the outcomes after arthroscopic partial meniscectomy were no better than those after a sham surgical procedure.
The Finnish study looks very similar to this one from 2002, on arthroscopic surgery for osteoarthritis of the knee, which reported:
At no point did either of the intervention groups report less pain or better function than the placebo group... the outcomes after arthroscopic lavage or arthroscopic d├ębridement were no better than those after a placebo procedure.
These studies (and others that Ariely discusses in his book) raise the question of how often the positive results of surgical procedures are driven largely by placebo effects. Unlike pharmaceutical products, surgical procedures are often not rigorously tested in randomised controlled trials in order to determine efficacy. They continue to be performed because surgeons think they work, because patients exhibit positive responses to them.

Is the placebo effect an example of irrationality though? Does being tricked into thinking that something has positive effects mean that we are irrational? Here, I disagree with Ariely.

A rational person weighs up the costs and benefits of a decision, and proceeds where the benefits outweigh the costs. So, let's start by considering the costs and benefits of surgery (vs. not undergoing surgery) on your sore knee. If you don't have the surgery, then you experience some level of pain and discomfort. If you have the surgery and are affected by the placebo effect, then you experience less pain and discomfort. This is a benefit of having the surgery, and it's still a benefit even if it's only a placebo effect (and therefore not 'real'). I don't think it matters if the benefit arises solely because we are not fully informed that the surgery has no lasting or 'real' benefits.

On the cost side, there is a monetary cost (which in a purely public health system such as New Zealand is borne by the taxpayer, but in private health systems may be borne by the patient or by their insurer) and opportunity costs (cost of foregone income and leisure while in hospital or recovery). There is also the risk of serious or minor medical complications arising from the surgery itself.

So, for the patient themselves, they are weighing up a reduction in pain and discomfort against the monetary and opportunity costs, and the risk of complications. If the benefits outweigh the costs, then the patient should choose to have the surgery.

However, if people are fully rational, we assume that they are fully informed. That is, they know all of the pertinent information that is relevant to their decision. So, a fully rational person would know about the placebo effect, and know whether the surgery is going to confer 'real' benefits or not. In this case, the rational person would not undertake the surgery, because the costs clearly outweigh the (non-existent) benefits.

But wait! Isn't the fully-informed rational person foregoing benefits of the surgery that they could have experienced had they chosen not to be fully informed?

For at least some of those suffering from painful knees, the net benefit of not being fully informed (and therefore choosing to undergo the surgery and receiving the placebo benefit) exceeds zero (which is the net benefit of not undergoing the surgery and continuing to suffer pain and discomfort). So, being fully informed about this possibility they should choose not to be fully informed. It's just as well that people aren't fully rational because otherwise, how would we solve this paradox?

Given that patients aren't fully informed anyway, why not just let people have their placebo surgeries? Some 97% of doctors already prescribe placebo medicines anyway.