This week in research #39

Here's what caught my eye in research over the past week:

• Aina, Aktaş, and Casalone (open access) look at how the allocation of workload across university courses affects students’ outcomes, finding that reducing the number of courses in a degree, while keeping the total course work unchanged, strongly reduces students’ performance and increases first-year dropout rates, and that the effects are larger for students from less affluent families
• Omberg (with ungated earlier version here) finds that Uber’s arrival to a US city resulted in decline in the unemployment rate by between a fifth and a half of a percentage point
• Taylor and Livingston (open access) show that the minimum unit price for alcohol in Northern Territory implemented in 2018 impacted very few alcohol transactions, as it was set very low (AU$1.30 per 10g of alcohol)
• Huckle, Moewaka Barnes, and Romeo (open access) find that 17 percent of substantiated child maltreatment among Māori from 2000 to 2017 could be attributed to parental hazardous alcohol consumption
• Mikkelsen and Peter (open access) examine a Swedish parental leave reform in 1995 that reserved one month of leave for fathers, and find that the reform increases the probability of doing a maths-intensive programme in upper secondary education among girls whose father was otherwise reluctant to take leave, with no effect on boys

Te Papa Tongarewa embraces price discrimination, but other tourism operators are still missing the trick

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:

1. 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);
2. The firm must be able to deduce which customers belong to which groups (so that they get charged the correct price); and
3. 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.

Read more:

• Are tourism operators in NZ missing a trick?
• Price discrimination in tourism... India edition
• Price discrimination and the Great Walks
• Hamilton Gardens' entry fee for tourists as a form of price discrimination

China's export restrictions on resources for semiconductors

The Financial Times reported last week (paywalled):

Chinese export controls on crucial semiconductor materials are hitting supply chains and stoking fears of shortfalls in western production of advanced chips and military optical hardware.

Beijing’s curbs on shipments of germanium and gallium, which are used for semiconductor applications and military and communications equipment components, have led to an almost twofold increase in the minerals’ prices in Europe over the past year.

China introduced the restrictions, which it says safeguard its “national security and interests”, last year in response to US-led controls on sales of advanced chips and chipmaking equipment.

The FT article focuses on the effect of the export controls on Europe. However, I want to look at the effect of the export controls (an export quota) on the prices of the resources (gallium and germanium) in China. However, let's start by considering why China is an exporter, and the gains from trade for China. This is demonstrated in the diagram below. China has a comparative advantage producing these resources. That means that China can produce gallium (or germanium) at a lower opportunity cost than other countries. On a supply-and-demand diagram like the one below, it means that the domestic market equilibrium price of gallium (PD) would be below the price of gallium on the world market (PW). Because the domestic price is lower than the world price, if China is open to trade there are opportunities for traders to buy gallium in the domestic market (at the price PD), and sell it on the world market (at the price PW) and make a profit (or maybe the suppliers themselves sell directly to the world market for the price PW). In other words, there are incentives to export gallium. The domestic consumers would end up having to pay the price PW for gallium as well, since they would be competing with the world price (and who would sell at the lower price PD when they could sell on the world market for PW instead?). At this higher price, the domestic consumers choose to purchase Qd0 gallium, while the domestic suppliers sell Qs0 gallium (assuming that the world market could absorb any quantity of gallium that was produced). The difference (Qs0 - Qd0) is the quantity of gallium that is exported. Essentially the demand curve with exports follows the red line in the diagram.

In terms of economic welfare, if there was no international trade in gallium, the market would operate at the domestic equilibrium, with price PD and quantity Q0. Consumer surplus (the gains to domestic gallium consumers) would be the area AEPD, the producer surplus (the gains to domestic gallium producers) would be the area PDEF, and total welfare (the sum of consumer surplus and producer surplus, or the gains to society overall) would be the area AEF. With trade, the consumer surplus decreases to ABPW, the producer surplus increases to PWCF, and total welfare increases to ABCF. Since total welfare is larger (by the area BCE), this represents the gains from trade.

Now consider what would happen if there is an export quota limiting the quantity of gallium exports below (Qs0 - Qd0). This is shown in the diagram below. Let's say that the quantity of exports is reduced to the amount between B and G on the diagram (about half the amount of exports that were previously occurring). Now consider what happens to the demand curve (including exports). The upper part represents the domestic consumers with high willingness-to-pay for gallium. Then there is a limited quantity of exports that are allowed under the export quota, at the world price PW. After that, there are still profit opportunities for domestic suppliers (that is, there are still some domestic consumers who are willing to pay more than what it costs the suppliers to produce gallium). So, the demand curve (including the export quota) pivots at the point G, and follows a parallel path to the original demand curve (i.e. the demand curve including exports follows the red line in the diagram). The domestic price is the price where supply is equal to demand (P1). The domestic consumers choose to purchase Qd1 gallium at the price P1, while the domestic suppliers sell Qs1 gallium at that price. The difference (Qs1 - Qd1) is the quantity of exports of gallium.

Now consider the areas of economic welfare. The consumer surplus is larger than it was without the restricted exports (it is now the area AJP1), the producer surplus is smaller than it was without the restricted exports (it is now the area P1HF). There is a new area of welfare KLHJ, which is the profit that exporters of gallium would receive from exporting, because they can purchase the gallium at the price P1 domestically, and then sell it to the world market at the price PW. This area KLHJ is the licence-holder surplus. Total welfare is smaller than without the restricted exports (it is now the area AJHF+KLHJ). There is a deadweight loss (a loss of total welfare arising from the restricted exports) equal to the area [BKJ + LCH] - these areas were part of total welfare with trade and no restricted exports, but have now been lost. The reduction in exports makes domestic gallium suppliers worse off, as well as society overall (in terms of economic welfare in total). However, domestic gallium consumers benefit in terms of higher consumer surplus, and the export licence holders are a new group that gains from these restrictions.

Now, the model we used above relies on an assumption that Chinese decisions about gallium (or germanium) exports do not affect the world price. In fact, because China produces 98 percent of the world's gallium, and 60 percent of the world's germanium (according to the FT article), this is unlikely to be true. When China restricts exports through the quota, the world price will increase. That has the effect of increasing the surplus for the export licence holders, but otherwise doesn't affect domestic consumers or producers. However, it will make international consumers worse off, since they would now have to pay a higher price for gallium. And that's what the FT article shows. However, now we know that it isn't just the global consumers of these resources who are worse off, but Chinese mining companies, and Chinese society generally, as well.

Taylor Swift tickets and the endowment effect

The Wall Street Journal reported last month (paywalled, but see here for an alternative):

Taylor Swift ended the European leg of her Eras tour on Tuesday at London’s Wembley Stadium, delighting nearly 100,000 cheering “Swifties”—but leaving many who couldn’t snag a ticket disappointed. One reason: the failure of the secondary market in tickets. Swifties have the same mental biases as the rest of us, making them reluctant to sell even at eye-watering prices.

Markets work on the basis of supply and demand setting a price. If there is more demand than supply, the price rises until fewer people are willing to buy and more are willing to sell. The basic problem is that Swifties mostly aren’t willing to sell, so the price soars until demand is destroyed—hitting well over $1,000 for many tickets...

I have firsthand experience: My eldest offspring snagged tickets months ago to take my besequinned wife (but not me) to the latest Eras concert. By this week the tickets were changing hands at more than eight times face value, and both agreed they wouldn’t buy them at such a high price.

Given they wouldn’t buy at this price they ought to be, on traditional economic assumptions, willing sellers. But both dismissed the idea out of hand—and not merely because trading tickets is trickier than trading shares. There probably would be some ludicrous price at which they would have parted with the tickets, but even a quick profit of eight times their outlay in a matter of months wouldn’t do it.

The WSJ rightly offers up loss aversion and the endowment effect as explanations for this behaviour. Loss aversion is the idea that decision-makers value losses much more than otherwise-equivalent gains. The pain of giving something up is worth much more than the pleasure of gaining that same thing. One consequence of loss aversion is the endowment effect. Since giving something up makes people very unhappy (because they are loss averse), people prefer to hold onto the things that they already have. That means that, when a person owns something, like a Taylor Swift ticket, they have to be given much more to compensate them for giving it up than what they would have been willing to pay to get it in the first place.

This applies to lots of things, not just Taylor Swift tickets (although, honestly, Taylor Swift tickets was the exact example that I used in my ECONS102 class earlier this trimester). The original research example that described endowment effects, by Daniel Kahneman, Jack Knetsch, and Richard Thaler, used free coffee mugs to demonstrate the effect. People given a free coffee mug were generally unwilling to exchange it for a pen, and people given a free pen were generally unwilling to exchange it for a coffee mug.

Returning to concert tickets, tickets to the Oasis reunion tour sold out fairly quickly this week - I bet those who have those tickets also wouldn't be willing to give them up cheaply. A further interesting implication of the endowment effect arises in the case of Oasis tickets, since according to this tweet from the band's official X account:

Tickets can ONLY be resold, at face value, via @TicketmasterUK and @Twickets.

If the endowment effect applies, few ticket-holders will be willing to part with their tickets at face value. These secondary markets are unlikely to help many people who originally missed out to secure tickets. I guess we will see.

[HT: Cyril Morong at The Dangerous Economist, for the WSJ article]