Ten years ago, I asked whether tourism operators in New Zealand were missing a trick - why weren't they charging higher prices to tourists and lower prices to locals? In other words, why weren't these tourism operators employing price discrimination?
It may have taken ten years, but finally tourism operators are starting to see the light. As I noted last year, Hamilton Gardens' new fee structure is a form of price discrimination. Now, the national museum Te Papa Tongarewa is going to start charging a fee to foreign tourists (while remaining free for New Zealanders). As the New Zealand Herald reported last month:
Te Papa has announced it will start charging international visitors a $35 entry fee, citing the increased cost of energy, insurance and staffing.
The charge will apply from September 17 to people aged 16 and older. The national museum in Wellington will remain free for Kiwis.
Te Papa needs to raise $30 million annually to stay afloat, on top of the $44m it receives from the Government.
It’s hoped the new charge will raise several million dollars towards the museum’s portion which is currently met through existing partnerships, philanthropy donations, and commercial activities – as a conference venue - and from its cafes, retail stores and carpark.
Price discrimination occurs when a firm charges different prices to different customers for the same good or service, and where the price difference doesn't arise from a difference in costs. It costs Te Papa the same to provide the service to a New Zealander and to a foreign tourist. The difference in price (free vs. $35) is therefore price discrimination.
There are three conditions that must hold in order for price discrimination to be effective:
- There must be 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);
- The firm must be able to deduce which customers belong to which groups (so that they get charged the correct price); and
- There must be 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 such as Te Papa Tongarewa. Foreign tourists have low sensitivity to price (low price elasticity of demand) for two reasons. First, for a foreign tourist, there few substitutes to visiting Te Papa Tongarewa. In contrast, locals have plenty of other activities they can do rather than visiting the tourist attraction (there are many substitutes) Second, foreign tourists have usually also travelled a long way at great cost to get to New Zealand, so the cost of entry into Te Papa Tongarewa is pretty small in the overall cost of their holiday. For a local, any entry fee for Te Papa Tongarewa would entail a significant increase in the total cost of a visit (since the local doesn't have a high travel cost to get there, compared with a foreign tourist).
For both of those reasons, foreign tourists are relatively insensitive to changes in price compared with locals (foreign tourists have less elastic demand for visiting Te Papa Tongarewa). So, raising the price of entry isn't going to keep foreign tourists away in great numbers. However, raising the price for locals would have a much greater impact on the number of visits. Therefore, keeping the price low for locals, while charging a higher price for foreign tourists, is likely to increase profits for Te Papa Tongarewa.
All of this applies to other tourist operators as well. So, I remain surprised that there isn't a price differential for visits to Hobbiton, Waitomo Caves, or Whakarewarewa (to take just three relatively local examples). Tourist operators could even use price discrimination to paint themselves as friendly to locals. Who would argue against a 'large discount' for New Zealanders to visit iconic tourist attractions? They support the local community! Other than not using that framing, Te Papa Tongarewa has made the right choice. Other tourist operators are still missing this trick.
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