Characteristics And Impacts Of Goods With Hidden Charges: An Essay.

Inelastic Demand of Goods with Hidden Fees

Question:

Discuss about the Business Logistics Demand and Supply Chain Management.

Goods that have hidden charges are characterized by a wide range of factors which determines their production, distribution and eventual consumption. Despite their perceived profitability index to the firms, such goods do not exist in all markets. They have specific qualities that single them out in the market. More so, their presence is also chiefly determined by the level of consumer awareness as well as the trends associates with their consumption in particular. This paper looks clearly on the characteristics of such goods as revealed in all markets. Moreover, the paper will also delve into establishing any existing relationship between international tourism and the hidden charges while paying special attention to the turn out for imports and their impact on the market equilibrium. Finally, the paper will analyze the impact of hidden fees on the exchange rate with respect to the interrelationship of demand and supply.

Goods with hidden fees exhibit inelastic demand. For instance, there is an insignificant to zero response that consumers have on their consumption. Changes in prices do not result into bigger changes in the amount demanded by consumers. This implies that consumers have a smaller influence on the consumption trends that are rife in the market. Instead, according to Thornton & Arndt (2003), producers do have a bigger influence on price determination.  Since consumer consumption is stable due to this unresponsiveness to price changes, producers are therefore able to changes prices for bigger realization of revenue. The excludability of these goods means that consumption levels is always bound to hit top notch because their choices are limited in the market (Economist 2017). For example, the airplane ticket prices will always carry extra fees because there are no close alternatives in the market for the goods. This is another avenue that means consumer awareness is not easily realized.

Absence of closer substitutes. Goods that have hidden charges are primarily exclusive in the market. As a result consumer choice is decimated hence giving producers in the market an autonomy in the price determination. Airline charges have zero close substitutes that consumers can resort to indicating a situation whereby there are stuck with consumption amounts available in the market. Since the United States is able to increase these hidden charges, there has never been incentive by the consumers to seek for other substitutes to realize maximum satisfaction (O’Connell & Warnock-Smith 2013). In other consumption is always stable as a result of the lack of these substitutes that consumers would eventually resort for.

A clear characteristic of goods with hidden charges is that the market is rife with price discrimination. It is devised on the back of the airlines are able to issue different prices for different consumers. Moreover, the peak hours generate a lot of revenue because consumers have to dig deeper in their pockets to buy the tickets as well. A case in point is that it is still down to the lack of substitutes in the market for these goods that makes producers chiefly determine the amount that customers pay for the goods. As aforementioned, consumers are stuck in sourcing for ways to cut down on the high prices in the market. Another important aspect according to Mumbower, Garrow and Newman (2016), is that prices for these goods are determined by the producer exclusively because the market has no autonomy for create consumer awareness that goes a long way in having price responsiveness. Furthermore, this makes the market for this goods have monopolistic tendencies. The fact that producer is the price maker for these goods implies that there is a minimal impact of the market forces in determination of the quality demanded as well as the supply. Instead producers have to balance the price and quantity available in the market to realize bumper profits. In essence, profits can be realized both in the short run and the long run.

Absence of Closer Substitutes

The tax incidence for goods with hidden fees fall primarily on the consumers. This is attributed to the producer aspect of price making as well as elastic demand. A higher tax will always translate into consumers bearing the burden through increasing the prices. This comes through price discrimination. However, this case is sequentially followed whereby a single firm’s decision is followed by all firms adopting the same set of conditions.  for instance in the United States, when a certain airline firm sets high prices for baggage and other itineraries it sets up a similar scenario in the entire industry. However, this move has a long term disturbances for the economy because a firm that decides to set a $50 dollar increment will lead a similar case within a short period of time hence ending up as a standard rate across the entire industry.

Hidden fees have a huge effect on the imports made by the United States trading partners particularly with regard to the tourism industry. Inclusion of hidden fees stifles the balance of trade among the trading partners involved with the US. They end up having expensive imports while the US gets cheaper exports. The balance of trade is therefore unfavorable. Furthermore, international tourism faces a huge threat in terms of substitution from domestic markets reorganization (Heller 2010). Domestic cultural diversity for instance is changing the tourism dynamics in the international market. It is emerging as a huge threat to the returns realized in the mass tourism. Basically, substitutes to tourism alludes to alternative tourism that ensures services such as thematic tours, eco-tours, adventure tours as well as products entertainment, food services, travel agencies. Specifically, an increment in the domestic tourism in terms of a preference for these services reduces the demand for international tourism products. As these products are becoming more valuable in the market, there is lesser international tourism plummets as international numbers sharply reduce.

The aggregate demand for international tourism reduces since there will be a big cut on the tourism numbers travelling all around the world as motivated by these products. In others words, the equilibrium price reduces while there will be a comparatively similar case for equilibrium quantity. On the supply side, while consumers resort for substitute products in the market in the form of domestically tailored products, there will be an increase in the aggregate supply which pays attention to the move by consumers to have a better market control through the locally available products (Clark 2016). A reduction in the number of consumer is testament to an eventuality that leads market reorganization whereby individual producers are determinants of the quality the equilibrium quantity and price with respect to supply.

The market need for the US dollars is influenced by both demand and supply while pegging it to the hidden charges. A favorable market rate for market demand and market supply of the dollar is basically established through an intersection of the forces of demand and supply.

In the above diagram, the relationship between demands for dollars is indicated by the demand curve and the supply curve in that the equilibrium price and demand for the dollars is established by the aforementioned intersection. At rest, which is without the inclusion of the hidden fees, the market is self-sustaining, the equilibrium price is established at point P while the equilibrium quantity is indicated by the point Q. in other words, and the market demand for dollars equals the market supply of the same dollars (Christopher 2016). In essence, the most suitable exchange rate is indicated by this equilibrium such that any changes to the structure will have consequences for to the market for the United States dollars as explained below.

In order to understand the effect of the hidden charges on the foreign exchange involving the United States dollar in comparison to other currencies, needs a recall on the characteristics of the hidden fees in an economy as well as the sector of concern. The case above indicates that the inelasticity of the market to price changes will have huge bearing on determining the value of the US dollar in this regard. First, when hidden fees are introduced, it means the demand for the US dollars rises as indicated by demand shift from demand₁ to demand₂. The more sales for the tickets is realized the more increase in the dollar. It means that the price for the US dollar will increase as shown by a movement in the equilibrium quantity from point P₁ to P₂ while at the same time, there will be an upsurge in the quantity demanded as well shooting from Q₁ to Q₂. In essence, hidden fees have an effect of increasing the demand for the dollar as compared to the rest of the world which translates to more revenue as indicated in the article.

References

The Economist, 2017. Hidden fees charged by hotels and airlines are bad for customers and the economy. Retrieved Online. Available on 19^th January 2017.

Thornton, E. and Arndt, M., 2003. FEES! FEES! FEES! Companies can't raise prices, so they're socking consumers with hundreds of hidden charges--and that's creating stealth inflation and fueling a popular backlash. Business Week, (3851), pp. 98.

Heller, M., 2010. The Gridlock Economy: How Too Much Ownership Wrecks Markets Stops Innovation, and Costs Lives. ReadHowYouWant.

Mumbower, S., Garrow, L.A. and Newman, J.P., 2015. Investigating airline customers’ premium coach seat purchases and implications for optimal pricing strategies. Transportation Research Part A: Policy and Practice, 73, pp. 53-69.

Clark, P., 2016. Stormy skies: airlines in crisis. Routledge: Abington, London

O'Connell, J.F. and Warnock-Smith, D., 2013. An investigation into traveler preferences and acceptance levels of airline ancillary revenues. Journal of Air Transport Management, 33, pp.12-21.

Christopher, M., 2016. Logistics & supply chain management. Pearson UK.