Thursday, 23 February 2017

Price discrimination in tourism... India edition

This short post by Alex Tabarrok at Marginal Revolution contained this picture:

So, foreign nationals at the National Museum of India in Delhi pay more than thirty times the price that Indian nationals do. Of course, this type of price discrimination is a topic I've written about before. Here's what I said then (in the context of entry to Ayutthaya in Thailand, but the principle is identical):
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.
Tabarrok asks:
 Is this fair or ethical? Would it be legal in the United States?
I don't know about the US, but it's not illegal here (or, evidently in India or Thailand). In fact, as I argued in that earlier post I'm surprised we don't see more of it in New Zealand. Price discrimination is a legitimate way for firms to extract additional profits from consumers who are willing to pay higher prices. It's just that it isn't usually quite as overt as in Alex's example.


  1. Auckland Museum has this. Admin free if you live/pay rates in Auckland. If you are from outside of Auckland - got to pay.

    1. Good example. And other New Zealand residents are by donation only (so effectively free).

  2. interesting take

    1. Kling has it pretty right. And if you're worried about the 'unfairness' of price discrimination, I suggest you read this: