Download Will Ocean Park price raising increase the total revenue?

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Will Ocean Park price raising increase
the total revenue?
In June this year, Ocean Park announced to increase ticket prices by 14%
from September 1, which is even higher than that of its rival Disneyland.
The tourism industry criticised that the percentage increase is too high.
How will Ocean Park price raising affect the number of visitors and the total
revenue?
The price rise is due to the rising costs
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At present, there are two theme parks, Disneyland
and Ocean Park in Hong Kong. The market is
oligopoly. The former increased ticket prices by
12.8% from the end of March while Ocean Park also
announced in late June that it will increase ticket
prices by 14% from September. It is pointed that the
higher increase rate of Ocean Park is unreasonable.
For oligopoly, although the service providers’ pricing
strategy will influence each other, they are still under
their own operating conditions to set the magnitude
of price rise.
According to reports, Ocean Park has not adjusted
ticket prices since October 2011. Yet, facing a 33%
increase in operational costs due to introducing
more new attractions in the past two years and the
increasing wages due to adding more jobs as well
as the increasing prices level and fuel costs, the park
believed that if it continues to follow the current
ticket prices, financial pressure will occur and so it is
necessary to raise prices.
Fewer visitors, more revenue?
In economics, according to the law of demand,
if Ocean Park increases ticket prices, the quantity
demanded of visitors for the park services will be
reduced. Mr Paul Leung, Chairman of the Hong Kong
Association of Travel Agents (HATA) criticised that the
excessive price increase of Ocean Park will worsen
tourism indirectly.
On the other hand, how will Ocean Park price
raising affect its total revenue? Michael Wu, the Travel
Industry Council chairman believes that the main
consideration of visitors to visit Ocean Park is the
attractiveness of the park’s facilities instead of the
ticket prices. If visitors are not sensitive to ticket
▲The ticket prices of Ocean Park are higher
than those of Disneyland. Some people from
tourism industry regarded it as unreasonable.
price changes, that is, the price elasticity of demand
will be inelastic. The price rise can increase the total
revenue of tickets (see diagram 1), allevitating the
financial pressure of Ocean Park.
Diagram 1: Ticket prices increase will
increase ticket sales
Ticket price (P)
P2
P1
Selected Concept(s)
Oligopoly
Gain
Loss
0
Q2
Q1
D
Number
of
visitors
(Q)
What are the impacts of Ocean Park price raising on
the number of visitors and the total revenue? We will
have to wait and see.
Hong Kong people can enjoy exclusive
offerings for the first two months
Facing higher ticket prices, Hong Kong people
can visit to the park when there are admission
promotions. Therefore, their price elasticity of
demand for the park services will be higher than
that of the tourists. In view of this, Ocean Park will
launch pricing concessions in the first two months.
Local people can buy tickets at a 15% discount.
There is no difference in cost for Ocean Park
to provide services to Hong Kong people and
tourists during the same period of time. Dividing
them into different groups according to their
price elasticity of demand and charging them
different admission is regarded as third-degree
price discrimination. This will allow ticket prices
of different groups as close as possible to the
maximum willingness to pay so that Ocean Park can
extract more consumer surplus.
To implement third-degree price
discrimination, Ocean Park must be able to
separate the markets of Hong Kong people
and the tourists. Requesting Hong Kong
people to show identity cards when
buying tickets and entering the park can
effectively prevent them from reselling
discount tickets to tourists for profit.
It refers to a type of market structure in imperfect
competition. Under this market structure, several
sellers dominate the whole market.
Law of Demand
It states that, an increase in price of a good
results in a decrease in its quantity demanded
within a certain period of time, and vice versa,
ceteris paribus.
Price Elasticity of Demand
It measures the responsiveness of quantity
demanded of a good or service to a change in its
price.
Price Discrimination
Elective
It is a kind of pricing behaviour by which
different prices are charged on different
customers for the same goods for reasons
unrelated to difference in costs.
Exam Practice
(a) Explain TWO factors that affect the price
elasticity of demand.
* (b)“Ocean Park price raising will inevitably cause
an increase in ticket sales.” Explain whether
the above statement is correct.
Suggested answer is on P.12 and www.
econschool.com/sample1314
Related Past Paper Questions
DSE 2013
‧Paper 2, Section B, Q.9(a)
‧Paper 2, Section C, Q.13(b)
DSE 2012
‧Paper 2, Section B, Q.12(a)
‧Paper 2, Section C, Q.14(a) - (c)
DSE Practice Paper
‧Paper 2, Section A, Q.3
Text: Shirley Chak　Translator: Grace Lam　Art: Ricky Chan　Photo: HKET