Is Maximizing Number of Visitors to Increase Regional Economic Impact of an Event Sustainable in the Long Run?

- An Analysis of Ticket Demand for the Peace & Love Music

Festival in Sweden Patrik Arousell* and Tobias Heldt*

* Department of Regional studies – Economics and Tourism , Dalarna

University

Paper presented at the symposium on Estimating the impacts of tourism and events, Centre for Tourism at the University of Gothenburg, March 20, 2014

The Basic Principle of the Study

Citation: (not) Cajsa Warg (1703-1769)

”We take what we have”

(The Fundamental Principle of Making a Meal)

Outline for the Presentation • What do we mean with sustainable? • Market, supply and demand conditions • Data, estimation and results • Consumer surplus and market equilibrium (given our estimates) • Conclusions

What do we mean with Sustainable? Entierely the Economic Perspective (and from a producers point of view) Monopoly Price: MR(q) = MC(q) Profit Maximisation Price: p = MC(q) Minimum Short Run Price: p = VC(q) Minimum Long Run Price: p = ATC(q) Min and Max Prices (long run): A price at least as high as in perfect competition and at most as high as in monopoly

Determinants for the Price Demand, Supply and Market Conditions Demand: Contingent upon the consumers preferences Supply: Contingent upon the production cost Market conditions: Contingent upon available substitues (perfect or imperfect)

Assumptions in the Analysis Market Conditions • Two commodities

• Peace & Love –festival visit • All other consumption (imperfect substitutes) (might be motivated by Hicks and Leontief´s Composite Commodity Theorem)

• (close substitutes [i.e. the 18 largest festivals in Sweden plus Roskilde] has been considered but estimation is invalidated due to the lack of data. But, it seems as Rockstad Falun is a complement to Peace & Love while Putte i Parken and Urkult are substitutes)

Assumptions in the Analysis (cont.) Supply • Parsimoniously treated • A cost function assumed as:

TC(q) = ∑αiqi

Assumptions in the Analysis (cont.) Demand Estimated by the Almost Ideal Demand System 𝑤𝑖 = ∑ 𝛼𝑘𝑛

𝑘=0 + ∑ 𝛾𝑖𝑖𝑙𝑙 𝑝𝑖𝑛𝑖=1 + 𝛽𝑖𝑙𝑙

𝑋𝑃∗

𝑙𝑙 𝑃∗ = ∑ 𝑤𝑖𝑙𝑙 𝑝𝑖𝑛

𝑖=1 where wi = Expenditure share on good i (Peace & Love), αk = Quantitative and binary variables, γij = Price effect by commodity j on commodity i, βi = Budget effect, X = Total expenditures

Data Derivation of Price for Tickets to Peace & Love Problem (related to Peace & Love): Cross sectional data set. No price variation over regions Assumption The price elasticity for transportation demand to Peace & Love has the same elasticity as the price elasticity of ticket demand to Peace & Love, i.e. εt = εp Condition for εt = εp

𝑝1𝑝2

=𝜕𝑞1𝜕𝑝2

𝜕𝑞1𝜕𝑝1

� where q1 = Demand for tickets, p1 = Price of tickets, p2 = Transportation cost

Assumed functional form for price: ln(pj) = ln(p1)+ln(p2)

Data (cont.) Derivation of Price for the Composite Commodity Index of price variation in homogenous basket of food within municipalities (yearly conducted by PRO) Motiviation • A Composit commodity can be constructed if the price of the commodies in

the basket are co-linear (i.e. Hicks-Leontieft’s Composite Commodity Theorem)

• Food prices correlates to a high degree with the price of (almost) all other commodities

Data (cont.) Share of budget spent on Peace & Love • Survey conducted by Högskolan Dalarna during Peace & Love

(from what region do the individual originate) • From the above survey, estimation of how many individuals

originiating from a particular municipality • Number of persons originating from a municipality, multiplied

by the municipality’s averaget income, divided by the regions total income, defines wi

Data (cont.) Intercept • Characteristics by municipality (age) • Binary variables for a single or a set of municipalities

• Single municipalities • Stockholm, Borlänge, Gagnef, Falun, Hedemora

• Set of municipalities • Fringe municipalities to the major cities, Fringe municipalities to Borlänge, Fringe

municipalities to the fringe municipalities of Borlänge, County residential cities

Data for Estimating Total Cost Function • Total cost according to the Annual Report from Peace & Love (5

observations, 2008-2012) (Sweden Rock Festival (2001-2013, 13 observations) show the same pattern)

Estimate of Cost Function Supply Definition of total cost function to be estimated ln TC(q) = α0ln(q) Implications No fixed cost Table 1. Estimation of Total Cost Function

Parameter Value Std. error t-value Significance α0 1,71 0,00681 250,7 0,0000

R2=87,5, R2 (adj.) = 87,5, RSS = 0,104, Std.error: 0,161, F(0,4) = X

Estimates of Demand Function Table 2. Estimation of the Alomost Ideal Demand System

Variable Value Std. Error t-statistic Sign. γ1 (transport) -0,00003914 0,000002721 -7,125 0,0000 γ2 (composite) 0,00004731 0,00005494 1,079 0,2815 β3 (budget) -0,0001134 0,00004407 -2,574 0,0106 α0 (intercept) 0,001325 0,0002731 4,852 0,0000 α1 (age) -0,0001300 0,00005544 -2,346 0,0197 α2 (fringe Sthlm) -0,00003632 0,00001252 -2,901 0,0040 α3 (fringe Goth) -0,00002153 0,00002099 -1,026 0,3058 α4 (fringe Malmo) -0,00001536 0,00002564 -0,5992 0,5495 α5 (Residens) 0,00002933 0,00001433 2,047 0,0416 α6 (Borlange) 0,001584 0,00006029 26,27 0,0000 α7 (Falun) 0,0001689 0,00005923 2,852 0,0047 α8 (Stockholm) 0,00004063 0,00005352 0,7592 0,4484 α9 (Gagnef) 0,0003589 0,00005746 6,245 0,0000 α10 (Hedemora) 0,0001288 0,00003959 3,253 0,0013 α11 (Dalarna 1) 0,0002459 0,00003104 7,923 0,0000 α12 (Dalarna 2) 0,00007294 0,00001936 3,767 0,0002 α13 (Norrland) 0,00001261 0,00002303 0,5476 0,5844 R2 = 87,61, R2 (adj.) = 86,88, RSS = 0,0000006716 Std.err. = 0,00004969, F(2,4) = 120,2 (0,0000)

Consumer Surplus Estimation Linearisation of the estimated demand curve around the point of estimate Example:

Estimated, D0(q)

Assumed, D1(q)

Consumer Surplus

Consumer Surplus (cont.) Result Table 3. Estimation of Regional and Total Consumer Surplus

Region Pop. CS Average (SEK)Stockholm 847 000 4 760 000 5,62Borlänge 49 200 5 210 000 106

Fringe 118 000 3 490 000 29,6Fringe, fringe 118 000 1 280 000 10,85

Residence 243 000 8 070 000 33,2Other 8 040 000 10 400 000 1,29Total 9 410 000 33 210 000

(Total Willingness to Pay: 207 million SEK)

Figure 1. Aggregated Demand and Supply

Figure 2. Total Revenue, Cost and Profit

Conclusions Conclusions • Strong regional preference

• Maximum number of visitors in 2011 (ATC(q) = p): q ≈ 50 000, p ≈ 2000

• Profit maximisation in 2011 (MC(q) = p): q ≈ 30 000, p ≈ 2 500 SEK

• Monopoly pricing in 2011 (MC(q) = MR(q) ): q ≈ 22 500, p ≈ 2 700 SEK

Policy implications and further research

• Results can be used by planners Understanding of the welfare effects of an event for the

region - local vs. tourist consumer surplus If regional authorities pushes the event organizers to

expand – they ought to be prepared to support a cost increase

– or in other way increase the demand for the event Note: such support should be motivated by knowledge of

the positive external effects the event brings to the region

• and event managers

Policy implications and further research

Further explore individuals preference structure for event visitor

Better understanding of visitor preferences for different aspects of the event design (different acts, festival length, number of stages etc.)

What is the marginal value of adding another act?? Better understanding of cost structure for event

production – more precise estimates of consumer surplus