1. Sunk vs. Bundled Costs & The First & Third Laws of Demand TREATMENT OF TRAVEL EXPENSES BY GOLF COURSE PATRONS Kelsey Conway

2.  Do Golfers treat travel costs as bundled costs (third law of economic demand)? Or do golfers treat travel costs as sunk costs (first law of economic demand)?  Used Ohio golf courses for the study  Locals vs. Tourists  Golf Tourists spent $321 million (out of a total of $2.7 billion) in 2002 – apprx. 9.3% of all golf rounds played in Ohio  Affected by price, course type, style, location and number of holes, etc. OVERVIEW

3.  Alchian-Allen Theorem: As a fixed cost is added to the price of two products, the more expensive product becomes cheaper relative to the less expensive product  Average Vacation vs. Great Vacation  Course A (Average) = $50  Course B (Great) = $100  Local would pay 100% more to play Course B  Tourist who is paying $200 in travel/lodging costs, only pays 20% more to play Course B  $250 vs. $300  The relative cost of playing Course B as compared to Course A is much less for the tourist RELATIVE COST

4.  If travel is considered a sunk cost – the cost of travel adds no value to the products being offered (golf) – therefore, the decision on which golf course to play is separate from their travel decisions (consumer theory)  Play Course A twice & Course B twice  If travel is considered a bundled cost – the cost of the travel and the cost of the golf are together  Play Course B more than Course A  Vacations vs. individual purchases  Customers who bundle are more likely to play Course B compared to those who treat travel as a sunk cost  As the bundled travel cost increases, the relative cost of the high-end golf course decreases SUNK COSTS VS. BUNDLED COSTS

5.  Which law of demand will apply?  First Law – more spent on travel, less spent on golf  Third Law – more spent on travel, more spent on golf  Result: Most golfers, especially golf tourists, bundle the quality costs with the intermediate costs of travel, lodging & food  Strong positive correlation between distance traveled and greens fee, greens & cart fee, total spend on course and total trip spending STUDY

6.  Golf Course Managers should utilize geographic segmentation in marketing plan  High Greens Fees – advertise in golf/travel magazines  Low Greens Fees – target local consumers through newspaper, etc.  Examples  PGA Championship – tickets vs. corporate hospitality  Met Golfer Magazine WHAT DOES THIS MEAN?