University of Edinburgh Business School Business Economics – BUST08005

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University of Edinburgh Business School Business Economics – BUST08005

Essay One 2021 (weight 50%)

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This year’s first essay assignment is split in four sections. Your task is to solve TWO OUT OF THE FOUR of the following projects using the knowledge acquired in class in combination with your own research. Each of the two sections you choose carries equal weight in the determination of the final mark for the essay:

Welcome to the University of Edinburgh Consulting Division (UECD). As an intern, you will be reporting to Lukas, the Director of Economics and Business Analytics and assist him in carrying out consultancy projects for clients all over the world. This summer, however, Lukas was trampled by a running bull while holidaying in Spain and his leg is in a cast. He cannot travel so you now must take the lead in the following projects:

PROJECT ONE: MADRID. (Bonus 10 marks for best answer)
Your first client is the European Commission’s General Tourism Directorate. Once you arrive to their regional offices in Madrid, you meet Amaia, the Deputy Commissioner, and she explains the project: “One of the major economic activities in the European Union is tourism, at least it was before the covid crisis, and we expect it to continue after we return to normal, hopefully in 2022. Still, it is unclear for how long travel restrictions (mandatory testing, quarantines, etc...) will remain in place since each European country has radically different trends and policies. We are particularly concerned with the post-Brexit UK as one of the main origin markets for holiday travel into the EU and we are constantly negotiating with them. In order to aid those discussions, our office wants a robust quantification of the impact these covid-related travel restrictions are actually having on monthly UK visitor numbers. This is where you come in. The last time I met with your manager he talked about carrying out an econometric study to estimate those impacts. The only requirement he had is that we should provide some critical data needed to do the regression. I have been looking into our files and the best that I can provide is a dataset with the monthly number of airline arrivals from the United Kingdom to all airports in the world between January 2016 and July 2021 (available on LEARN). It is up to you to decide how many destination cities or countries to include in your analysis, but you should endeavour to have diversity in travel restrictions (have a look at the UK travel lists). Also, you will need to complete the dataset with other variables from publicly available sources.”

You write to Lukas back in Edinburgh to update him on your client meeting but the only thing you get is a response from his secretary with a reading he left for you (see below). Perhaps this paper will give you some clues on how to continue this project. Amaia wants a short report (approx. 1,000 words) with three sections:

  1. a)  selection of sample of cities/destinations, explanatory variables and data sources (with justification and references to other publications and/or relevant theoretical concepts),

  2. b)  model specification and discussion of your econometric results (focus on the estimated coefficients),

  3. c)  brief mention of the limitations of your approach and possible ways to improve your model.

Remember to append your econometric estimation as well as the datasets as tables within the document.

Essential Reading:
Peng, B., Song, H., Crouch, G., and Witt, S.F., 2015. A Metaanalysis of International Tourism Demand Elasticities. Journal of Travel Research 54 (5), pp. 611–633. Available at https://journals.sagepub.com/doi/full/10.1177/0047287514528283

Hints: Refer to the guidance provided in the first Tutorial and do not start this question at the last minute, data collection takes time. The national statistics pages of each country could be an excellent data source. For example, the Spanish National Statistics Institute is called INE and it has an English page (http://ine.es/en/welcome.shtml). Eurostat can also be a helpful source of information. You will not be marked on the statistical significance of the econometric results.

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PROJECT TWO: PARIS (Bonus 10 marks for best answer)
The next month, you travel to Paris to meet Aurélien, the Head of Marketing of Carrefour. They recently decided to stop major sport sponsorships, like the French Football Federation or the Tour de France to focus more on retail and food events. However, the success and global impact of the last Women’s FIFA World Cup that took place in France led them to reconsider the decision. While the covid pandemic put a stop to their plans, they are now looking forward to sponsoring a female football club of the Division 1 Féminine (D1F). In order to decide where to invest, they have decided to commission a benchmarking analysis of the efficiency of D1F’s teams that also takes into account the performance of teams from at least one other country’s top division of female football (e.g. the Frauen-Bundesliga in Germany or the Primera División Femenina of Spain). One aspect that the client wants the report to cover is the “social” performance of the team, in order to gauge the potential advertising reach of any sponsorship agreement. The client has invited UECD and ten other consultancy companies to submit competitive proposals to win this project.

You call Lukas back in Edinburgh, and he suggests that you should collect some data and submit a preliminary report (approx. 1,000 words) using Data Envelopment Analysis (DEA) to do a simple efficiency study under the conditions mentioned by the client. He also sends a reading that could be helpful (see below). Your report should cover the following aspects:

  1. a)  Choose a DEA approach to be used in the consultancy study. Which variables are you including? (outputs, inputs, external). What kind of returns to scale and efficiency orientation will you employ? Justify your choices.

  2. b)  Describe your dataset and indicate its sources.

  3. c)  Present the results and explain the main implications for Carrefour.

  4. d)  Explain at least two ways in which you can improve the model if Carrefour awards UECD this

    project.

Remember that tables and appendices are not part of the word count. Essential Reading:

Fabíola Zambom-Ferraresi, Fernando Lera-López & Belén Iráizoz (2017) And if the ball does not cross the line? A comprehensive analysis of football clubs’ performance, Applied Economics Letters, 24:17, 1259-1262. http://dx.doi.org/10.1080/13504851.2016.1270408

Hint: Data for women’s football teams may be difficult to find. Do not leave this task to the end. Follow the instructions from the second Tutorial. Remember that you can download the DEAP software from https://economics.uq.edu.au/files/3918/DEAP-xp1.zip
It only works on Windows, but it does not require installation, so you can use it on any Uni Computer.

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PROJECT THREE: CHICAGO
Lukas is a personal friend of Kate, the Head of Sales of United Airlines (they coincided in their Masters year in Edinburgh) and thanks to that contact, another project opportunity has come up. Lukas forwards you Kate ́s email alongside a return business-class ticket to Chicago O’Hare International Airport (ORD). You read the email on the plane down to Heathrow:

Lukas,

Hope you are well, remember the HR mess that I mentioned last time? Well, it has escalated a little bit and now we have a really bad climate in the office. With the sharp decline in revenues after covid, our CEO wanted to hunt down customers using fraudulent booking ploys to save money. Now it appears that some people in my sales team had not been warning customers about the consequences of using “hidden-citytickets” (HCT), to the effect that a group of travellers have sued United Airlines (UA) about losing their travel miles. The company is looking to fire the employees responsible for this mess.

I need to commission a short report (approx. 1,000 words) on the existence of “hidden-city tickets” in routes between our main hubs to send our legal department. I would normally use our internal economics division for this job but, given the close relationship they have with my sales team, I prefer to use an external consultant. I wonder if you have someone that can draft the report and come to our office in downtown Chicago to deliver a presentation with its main findings.

Looking forward to your reply, Kate

While waiting for your flight connection in London, Lukas gives you a call and says that this is an easy one. Since you will have internet access in the plane, you can do this during the transatlantic flight. He recommends that you use the website www.skiplagged.com to do your research, and that you focus only on UA flights to be flown in any week of November 2021. Lukas wants to revise your work after you land before sending it to Kate, so you must email him a 1,000-word report with, at least, the following contents:

  1. a)  Introduction to the concept of hidden-city ticketing (illustrated with a screenshot of the largest hidden-city fare difference you found)

  2. b)  Describe your research on UA fares and present the main findings (supported by a summary table)

  3. c)  Explain the economic reasons for the existence of this type of tickets and briefly comment on how

    the covid pandemic would have affected your results.

  4. d)  Provide a back-of-the-envelope estimation of revenue loss for UA, and briefly explain why HCTs are

    otherwise damaging for UA and its customers.

Essential Reading:

CTV (2017) Hidden city ticketing: How air travellers are taking chances to save big

http://www.ctvnews.ca/business/hidden-city-ticketing-how-air-travellers-are-taking-chances-to-save-big- 1.3511629

GAO (2001) Restricting airline ticketing rules unlikely to help consumers

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http://www.gao.gov/new.items/d01831.pdf

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PROJECT FOUR: NASSAU.
The UA project went very well. When dropping you at the airport, Kate says: “I know some people who are looking for a pricing consultant. Yesterday I was contacted by a company called FYRE looking to rent an aircraft for some charter flights. They told me that they are organizing a big music festival in the Bahamas. Here is the link to their promo video: https://www.youtube.com/watch?v=mz5kY3RsmKo. I can give youFYRE’s contact, since you are already in the US, I think they will be happy to pay for your plane ticket to Nassau and cover your expenses while in there”. After talking to Lukas, you call FYRE and, with Kate ́s reference, they are happy to bring you in as a pricing consultant for the music festival.

Once in Nassau, you meet FYRE’s marketing manager Grant. He explains that they are organizing the festival in a small and remote island, so they are currently busy in planning the transportation (by plane or boat), accommodation, and catering for all attendees. However, your job is exclusively about pricing: Grant is very clear about the different types of festival experiences that he wishes to offer, however, the previous pricing consultant resigned due to disagreements with him. You can access all the data available so far and continue the project from there. Grant has designed three types of tickets, which only differ in terms of the quality of transport, accommodation and catering provided for the festival attendees: 1) the basic “Lodge” ticket, which includes flights, standard meals, and shared accommodation in a beach lodge; 2) the middle-end “Villa” ticket, which improves the quality of meals and includes private accommodation for small groups; and 3), the high-level “Ocean” ticket, which includes transportation and accommodation in a cruise ship, as well as luxury meals. After doing some research, the previous pricing consultant identified five demand segments (“VIP”, “Influencer”, “Traveller”, “Music”, and “Civilian”). He estimated the average willingness to pay of a representative individual in each segment for each of the three types of tickets. In addition, there are estimates of the market size and the costs of the marketing campaign that would be necessary to reach each segment. The operations team has also provided estimates of fixed costs and unit costs associated to each ticket version. All this information is summarized in Table 1. Finally, the marketing team also advises that reaching the “Civilians” segment is going to require distribution through third-party booking platforms (i.e. like Ticketmaster) which will take a 30% commission on our recommended retail price.

Table 1. Cost, demand, and willingness-to-pay estimates (US dollars)

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Lodge

Villa

Ocean

Fixed Cost Unit Cost

VIP 50 Influencer 20 Traveller 200 Music 150 Civilian 4,100

$14,500 $5,200 $19,800 $21,000 $30,000

$90,000 $180

$1,440 $1,010 $2,040 $1,670

$540

$150,000 $290

$12,020 $10,030 $2,970 $2,160 $580

$425,000 $440

$24,920 $20,040 $5,900 $3,090 $1,000

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Segment

Size (people)

Marketing Costs

Individual willingness to pay (per unit)
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The next day in the office, one of your co-workers reveals that the costs above do not cover renting the land for the festival site as well as other “hidden fees” that FYRE must pay to government officials. These extra costs add up to 2 million US dollars and they must be paid upfront so they need to make the highest possible profit from ticket sales. She also says that the last consultant got into a huge fight with Grant because of the number of ticket versions to offer. In this context, your job is to determine the optimal pricing strategy for the FYRE festival: how many ticket versions should they offer? At what prices? Summarize your method and conclusions in a short report (approx. 1,000 words plus tables). If you must cancel a ticket version, bear in mind that Grant will not accept any recommendation that is not supported by numerical data. After looking at the final results, do you have any further advice for the festival organizers?

Hint: The FYRE festival was a real event but this case study is fictional. In solving the exercise, you must follow the indications provided in the relevant Tutorial.

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You can provide tables, figures, screenshots, and appendices (e.g. with additional calculations) to support your arguments. These contents will not be part of the essay’s word count but they will be positively valued (5% of marks). You are also expected to look for your own additional references, which can include academic papers, industry reports, press releases, legal documentation, online videos, and other sources. Separate lists of references must be provided at the end of each section. Formatting and presentation will also be taken into account for the final mark (5%).

Essay length: 2,000 words (+/- 10% according to the University regulations) Deadline: 2pm on Monday, November 8th 2021

Any questions please contact: Dr. Augusto Voltes-Dorta Course Organiser augusto.voltes-dorta@ed.ac.uk

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Disclaimer: Even if the companies mentioned are real, all case studies are fictional. These projects are designed for teaching purposes only.

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