Tourist price sensitivity and the elasticity of demand: The case of BC ferries

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1. Critically assess the method the author uses to calculate the price elasticity of the ferry transport. Comment on the data, variables, and assumptions used in the calculations. What is the product as defined by the author? Is this the same way consumers think of the product?

The paper under study explores how transportation pricing can influence tourist’s decisions, especially for islands, for which transportation is key to succeed. The case exposes how B.C Ferries had to increase its fares twice between Vancouver Island and the main area because of declining subsidies and operational costs increase (1997-1998), with the possibility of having to increase them again. Therefore, it was necessary to conduct a study to understand how sensitive consumer demand is to a change in the fares (elasticity).
The study was conducted by the Tourism Management Department of the University of Victoria’s Faculty of Business and involved 448 mainland B.C residents. Of the 448, only 51% classified as pleasure tourists (n=230), meeting the profile of the domestic tourist from the past ten years. A questionnaire was sent to them by mail, asking several questions regarding price sensitivity to some other trip components as well as to variation in
ferry fares. Some valuable information obtained through the questionnaire was:

• Frequency of pleasure trips (3.1 roundtrips trips a year)
• Common dates for those pleasure trips (July and September)
• Average stay (3 days)
• Annual household income ($50,000 - $59,000)
• A breakdown of their typical trip expenses (average of $251.16 per day)
• Assessment of trip components from “very good value” to “poor value” (Poorest value: Ferry transportation)
• Respondent’s perception of the relative importance of trip components to the overall planning (highest concern: Ferry trip)
• Average number of trips per year after a potential 20% fare increase (reduction by 1.4 roundtrips per year, (ratio = -2.24)
• Average number of trips per year after a potential 20% fare decrease (increase by 1.9 roundtrips per year, ratio = +3.01)

In terms of data, there are some observations:

• The paper does not mention the criteria used to select the 448 mainlad B.C residents, what can lead to inaccurate results. For example, some of them could have never travelled to Vancouver Island, may not know reference ferry fares, etc. In addition, the paper mentions that “The demographic and travel behaviour characteristics of the sample was similar to the domestic tourist profile that has emerged over the past ten years in Tourism Victoria’s annual exit surveys” (Pritchard, 2003). It is very important to state that this affirmation does not imply that the sample was picked correctly, as demographic, travel and lifestyle behavior could have changed significantly in ten years. In addition, it does not mention the criteria used to classify residents as “pleasure tourists”.

• In addition, the paper does not mention which was the criteria used to decide that the survey had to be conducted via email. It is important to mention that selecting the right channel is very important. In order to do it, it is necessary to understand which of the potential channels fits best the target population lifestyle. Sending the questionnaire via email could had been the root cause of the possible inconsistency mentioned by the author.

• In terms of how the questionnaire was conducted I would suggest to include more goods and services on it, so tourists are not biased to answer that the variation of the number of trips will increase more if the price decreased that what it would decrease if the price increases. Also, the way questions were asked is very important, the right question should be : “If the price of ferry tickets increased to $X, how many trips would you do annually?” instead of “If the price of ferry tickets increases by 20%, how many trips would you do annually” because in this case, people would be biased and results will be affected.

In terms of variables, I consider that the questionnaire could deliver more useful results, such as:

• What type of trip do travelers usually do (familiar, with friends, couples, etc.) as well as their favorite activities to do/attractions to visit in the island. This could be valuable information for the strategic response.
• Provide information regarding why most of the residents classified ferry transportation as “poor/good value”
It is important to mention that the product described by the author, differs from the one saw by the government and consumers. First, the government conceived the product as one that is not sensitive to price changes, increasing its price twice in one year, causing a detrimental effect that turned it into a public policy issue. Second, the author describes ferry demand sensitive to price changes but not as drastically as customers conceive it: ferry fares are the #1 factor considered by travelers when planning a trip (and at the same time, most of them classify it as a “poor value”)



Are the estimates consistent with what you expect? Why or why not? Make sure to think about the determinants of price elasticity of demand.


The determinants of price elasticity of demand are:

1. Substitutability.
Substitutability refers to the availability of similar products that could replace the good needed/desired. If close substitutes are available, its demand tends to be more sensitive to price changes (elastic) as people will have the possibility to shift to the closest substitute. In this case, there are no substitutes in terms of transportation, B.C. Ferries is a public corporation, the only one that transports travelers between Vancouver Island and the mainland. However, tourists can substitute Vancouver Island with any other place for their next vacations. That is why, in this case, demand is expected to be elastic.

2. Timeframe
Demand is more price sensitive (elastic), the longer consumers have to respond to a price change. In this case, fare changes were conceived to be for the long run, and therefore tourists will have enough time to search for cheaper substitutes and switch their spending (such as selecting a new destination for vacation trips). Therefore, we can say that in terms of timeframe, demand is expected to be elastic.

3. Income share
Products that take up a considerable percentage of income will have a more elastic demand. In this case, ferry fares do not tend to be expensive, so demand is expected to be inelastic.

4. Luxury vs. necessity
Products or services that cover necessities (food, medicines, etc.) tend to be inelastic, while products or services classified as “luxuries” (trips, jewelry, etc.) tend to be elastic. This research covers pleasure trips, so the product can be considered as luxury and its demand is expected to be elastic.

When analyzing each of the determinants independently, demand is to be elastic, however, the study exposes more extreme results.
First, substitutes availability represents the most important factor to understand if a good’s demand will be sensitive to a price change, however, in this case, even when there is not another ferry company that could transport tourists from Vancouver Island to the main area, tourists can switch their vacation destination to some other, including options that may not require to pay for ferry transportation. Second, ferry fares do not represent a high percentage of average household incomes so an inelastic demand is expected, however, when tourists were asked to rank their travel expenses from “very good value” to “poor value”, the worst score was given to “ferry transportation”, making it more elastic. Finally, trips can be considered as luxury, especially for middle class.
Therefore, the reality is that the product demand is significantly elastic (tourists will respond more elastically to the 20% decrease in fare, compared to an increase in the fare by 20%.)


Price elasticities are very important for setting prices. Are there any strategic options you would suggest to increase revenues? I am looking for creative and original ideas.

1. Tourists under study were asked to rank trip components from “very good value” to “poorest value”, getting “Attraction & recreation” the highest score, followed by “Accommodation” (which is also ranked as a low importance factor when planning a trip). Therefore, I would suggest two alternatives:
• Building and opening new attractions. I would suggest that the price of visiting these attractions should be enough to compensate a ferry fare decrease.
• Increasing slightly the price of current attractions and accommodations (but enough to compensate ferry fares decrease) or maintaining ferry fares by creating an accommodation + transportation package at a higher price.
As an immediate response to the situation, the tourism industry has lowered the rates of accommodation when respondents considered accommodation a good value for money. This means that lowering the accommodation rates will not benefit the tourist industry even in the short run.

2. I would suggest, as a second option, to work on increasing the value that tourists assign to ferry transportation. In order to do this, B.C Ferries will have to work on transforming it from a “requirement” (to go on vacations) to an “experience”. Some ideas are:
• Increase comfort (comfortable sits, add snacks, etc.)
• Entertainment activities for children
• Attractions for adults (movies, gaming, etc.)
• New restaurants/bars, souvenirs selling (what will also lead to an income increase)

3. The third suggestion would be to increase the price of tickets during high demand periods and times (July, September)