Friday, June 18, 2004

School terms and holiday prices

Liberal Democrat MP Malcolm Bruce recently called for an inquiry into holiday prices to be conducted by the Office of Fair Trading. The reason?

Liberal Democrat spokesman Malcolm Bruce has asked the Office of Fair Trading to investigate what he calls a "feeding frenzy" by holiday firms.

He says parents could be cross-subsidising other holiday-makers by paying top rates for peak-time breaks.

There is a simple explanation for why the term time holidays are cheaper. It's due (1) the law of supply and demand and (2) to the fact that school timetables are synchronized such that school holidays occur at the same times across different schools leaving narrow windows of opportunity for most parents of schoolkids to take a holiday.

Many parents cannot take holidays in term time, thus ensuring lower prices for term-time holidays. When the school holidays come along, suddenly everyone can go on holiday hence a spurt in demand and the holiday companies exploit this opportunity for profit by charging more than for holidays in term time when demand is lower.

Malcolm Bruce himself highlights this:

The market is being distorted, he argues, because school holidays are set through public policy, and parents cannot pick and choose holiday dates as freely as other groups. "It appears that families are being exploited and the extra revenue being shared with travellers who have more flexible options. In other words there appears to be a cross subsidy.

"The demand at half term is generated as a result of government or local government policy and is therefore not determined by free market forces."

So both myself and Mr Bruce agree that the problem is due to conditions created by government policy where school terms leave a narrow window in which parents can take a holiday.

It seems to me that the solution is obvious -- allow schools to stagger their term times so that the holiday period is longer and parents are not all demanding their holidays at the same time. This would result in lower prices for the out-of-term holidays, reduce the pressure on parents to take children out of school during term-time and thus boost attendance levels and lower frictions between parents and teachers.

Instead Mr Bruce suggests the Office of Fair Trading should investigate holiday companies, implicitly suggesting the companies should be forced to lower their prices somehow.

If the companies were forced to lower prices during out-of-term holidays this would simply boost demand for these holidays even further (e.g. those able to take holidays at any time might would find them more attractive), and the result would be that the market would not be able to supply an out-of-term holiday to everyone who wants one at the lowered price. Unable to charge higher prices in the out of term holidays, they'd increase the prices of holidays during term time.

This would leave parents back with the same problem again (unable to get an out-of-term holiday but this time because there aren't enough to go around), only this time the term-time option will have become more expensive as the holiday companies try to recoup the money would have got for the out-of-term holidays. Mr Bruce's proposed solution would thus make the problems worse.

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