Streetwise Professor

May 26, 2007

For Only Pennies a Trade!

Filed under: Exchanges — The Professor @ 10:19 am

LSE CEO Clara Furse writes to the FT defending exchange pricing. She notes that exchange fees represent a small fraction of total trading costs–which as I have noted is exactly what gives exchanges pricing power, though Ms. Furse doesn’t make that point.

The relation between elasticity and expenditure share reminds me of a story I use to illustrate this point to my students. I am a big history buff, and in the early 1990s I made a trek to the coast of the Cape Breton Island in Nova Scotia to visit the old French fortifications at Louisburg. (I highly recommend this to all military history buffs.) In any event, in the entryway to the Visitors’ Center was a sign saying that the museum was facing financial difficulties, and requesting donations to allow it to continue operating. I went inside, and paid my admission–C$8.50. I gladly paid this sum, and thoroughly enjoyed my visit.

When I returned home to Michigan, I sat down and wrote Parks Canada a letter. I explained that Cape Breton is very isolated, and as a result it is quite expensive to take a trip there. Flying was very expensive, and the typical auto traveler would spend several days to get there, thereby incurring several days lodging expense, plus the cost of gas, mileage, etc., not to mention the opportunity cost of time. Hence, the $C8.50 visitors’ fee was a small fraction of the cost of a trip to visit Louisburg, and doubling or trebling it would increase the cost of a visit by only a couple of percent, making the demand for admissions very inelastic. I told Parks Canada that as a result, they could raise the price substantially without reducing the number of visitors proportionally, thereby raising revenue–and solving the site’s financial difficulties.

A couple of weeks later I received a letter from Parks Canada. They thanked me very much for my letter. They also said I was the only person that had ever written them suggesting that they raise fees;-)

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