SUPPLY and demand: remember them? If the demand for a good or service goes up, and its supply doesn’t increase as much, then prices go up. If supply increases, and demand doesn’t, prices go down. It’s not rocket science, and it explains just about everything about our society. It is the reason why some takeaways charge less on Monday nights, why champagne costs more than water and why people with PhDs in mathematics earn more than people with no qualifications. It’s a tragedy that the public debate remains depressingly unable to understand the implications of such basic microeconomics.
Take the cost of holidays. It is more expensive to travel at peak times, when everybody else also wants to go on holiday, than during the low season, when children are at school and employees at work. To those who understand how the world works, that makes sense and is the sign of a system that is working. It ensures an efficient allocation of resources, with price signals incentivising people who don’t have to travel during school holidays to wait until a less busy period.
Yet many members of the public – including the large number of signatories of a recent petition on the subject – are shocked by this. To them, it is a disgrace and an obvious case of profiteering; some even believe it to be a giant conspiracy. MPs will be moaning about all of this shortly in Parliament.
I don’t get it. What are holiday companies meant to do when demand shoots up? Keep prices constant? Cut them even, driving consumers into a frenzy? And presumably, given the collapse in revenues, they would have to jack up their prices during the rest of the year, when fewer people want to travel, to remain afloat financially? That would mean emptier hotels and flights for most of the year and a decline in the total number of annual travellers (the same number would go on holiday, albeit more cheaply, during sold-out peak times, while fewer would do so during the rest of the year). This would be followed by the mass bankruptcy of travel companies, hotels and even airlines. Competition would be reduced, prices would rise and choice would be restricted. Trying to buck market forces is always a dumb idea.
What about the idea that the whole thing is a giant conspiracy? There may at times be instances of anti-competitive behaviour by some players in some markets (though a US judge dismissed one major case last week). In the UK, the Office for Fair Trading recently pushed through some changes: it thought that some restrictions on discounting limited competition on room rates between online travel agents and hotels’ websites. Whether this was a significant problem and whether the reforms will make any real difference remains to be seen – but it won’t affect the basic economics of the industry.
The simple truth is that the modern travel market is highly competitive overall. Consumers can buy tickets from a myriad of cut-throat low cost airlines; they can book a trip directly with one of hundreds of thousands of hotels around the world. There is more information, accountability and feedback than ever before.
There are only two ways scarce goods or services can be allocated: either via the price system, by allowing markets to clear freely; or through rationing, which would require the government choosing who can travel and when and at what price. The second option would not only destroy the travel industry but it would also annihilate liberty and the freedom of choice. Some problems could be alleviated if schools varied term dates – but families often have children in different schools so this isn’t always practical. We would all like cheaper prices all of the time. But that’s silly: travelling will always cost more when most people want to go on holiday. It’s a feature of a well-functioning system, not a bug.