Is there a good way to measure economic contributions...

…of individual players in an established industry?

Lemme 'splain.

Say the city of Middlesville has a middling amount of tourism, and a middling-sized hotel industry to deal with their accomodation needs - worth about, say, a million dollars a year, counting over the whole industry.

Bob the entrepreneur, looking around at the state of the industry, reckons that the current providers aren’t up to much, and he can do better. So he sets up a couple of hotels. As it happens he’s right - he can do better. His hotels are somewhat nicer and somewhat more efficiently run than the existing ones, and after 5 years he’s wildly successful, and has a market share of about two-thirds of the Middlesville hotel industry. Which is now only worth $900,000, by the way, since his increased efficiency means he can offer somewhat lower prices than his competitors - one reason that he’s been so successful.

What’s Bob’s personal contribution to the economy of Middlesville?

Lots of people would give the simplistic answer of “$600,000 a year” - the amount his own hotels make. But of course, if he didn’t own the hotels that are making that profit, someone else would, as evidenced by the fact that 5 years ago, someone else did. The fact that he, and not someone else, has that income is certainly nice for him, but it’s not all that significant to anyone who’s not Bob or one of his flailing competitors.

On the other hand, it would be unfair to Bob to call the answer “zero”, because he has done useful work in making a slightly superior product available at a slightly cheaper price.

Are there any recognised tools among economists for thinking about this kind of problem?

Ah, but would they have been making it in Middleville? It’s quite likely that the presence of decent hotels in the area will have raised the amount of visitors to it, specially if any of them is a destination-type place such as a spa or a weddings hotel.

Two terms that might help are counterfactual analysis and marginal analysis.

I chose hotels specifically on the assumption that hotel rooms are a pretty inelastic good - that, in fact, people usually visit an area for OTHER reasons than ‘there’s a nice hotel there’. At least, I do. But feel free to substitute any other fairly inelastic good

Yes, counterfactual analysis might be what I’m thinking of - and maybe its related term, impact analysis. I know impact analysis is used a lot for large government projects (building roads is a pretty well-known example round here)

Nobody decides primarily based on hotels, but it makes a difference at the margin. “Should we go on vacation this year to the History of Soap Museum in Middlesville, or to the Battle of the Pig’s Ear Monument in Edgetown?” “Eh, remember the last time we went to Middlesville? The hotel was a total fleabag, and the room service was rude.” “Oh, yeah, that’s true, Pig’s Ear Monument it is.” The tourists are going to whatever location they choose because of a tourist attraction, but which tourist attraction they choose is going to depend on the hotels.

In MY hypothetical, the data on number of visitors from five years ago and today is available. And it’s about the same. :stuck_out_tongue:

There is some of the feel of the OP in analysis of sports teams in metropolitan areas. It’s not enough to measure their ticket sales. Because if people weren’t watching a football game, they would be doing something else. It is legitimate to consider how many people are pulled in from outside the city, and how much they spend both in the park and outside of it.

Counterfactual analysis seems to be what the OP is looking for. Consider the city’s economy as it is now. Then run a simulation of the size of the city’s economy if Bob didn’t set up shop. The difference is the impact of Bob on the city. It’s not clear from the OP whether Bob caused other hotels to close down or not. It’s conceivable and maybe probable that Bob contributed more that $600,000 to the region due to spillover effects. Some of his guests end up eating at local restaurants owned by him. And maybe some of his competitors improve their game.

From the last post though, I’m guessing Bob did cause some of his competitors to close down. Maybe a realistic example in the spirit of the OP, would have 1-3 competitors close down, but total visitors to be up 25% over 5 years.

But… Assuming that the inflow of tourists and other visitors remains static. Bob has cut prices and put his competitors out of business, so the contribution to the city from the hotel business as a whole has gone down. There may be some increase in other areas as visitors spend the savings in the l̶o̶c̶a̶l̶ ̶b̶o̶r̶d̶e̶l̶l̶o̶s̶ restaurants.

Well, there is something in what you say. If we’re accepting that Bob is taking less money from a static pool of (say) 10,000 visitors a year and they were clearly willing to pay more if necessary (because they did before Bob showed up), then what Bob is clearly doing is leaving some money on the table that he could extract from his customers, presumably in the hope of gaining market share from his competitors.

The amount of that saving that the customers then go on to spend in town is hard to compute, but I think we can agree it’s likely to be somewhere between 0% and 100%.

Bob has clearly improved something for someone, but maybe it’s not the residents of the actual town.

Based on your presentation of the hypothetical, it sounds a lot like what Uber has done - come in as a lower cost provider, displacing some existing providers. If demand is inelastic like you have indicated, then the benefits appear to mainly be going to the tourists, who are realizing some “consumer surplus” - they were willing to spend at least 1 million on accommodations (as an aggregate) for their visits based on the historical numbers, but now only have to spend $900k - so they are realizing $100k consumer surplus. Presumably they can now spend this $100k in other parts of the economy, though if they don’t spend it in Middleville, Bob has arguably had a negative contribution on Middleville’s economy. However, assuming at least some of the money is spent on other businesses in Middleville, he has had the effect of shifting some of the economic activity from the hotel sector to other sectors.

Adding in yet another wrinkle: if part of Bob’s efficiency is that he employs fewer staff than his competitors, then he’s achieved some of his profits by putting people out of work - a net negative for the town.

But if it turns out that the unemployment rate and the median wage didn’t change in the last five years (assuming your counting is fine-grained enough to actually detect any differences) , then clearly all those people did in fact get jobs elsewhere doing something useful and we’re back to “neutral” again

This is disturbingly similar to one of those “where is the missing dollar” problems, in which the answer always is that it’s not missing because the presentation is misleading.

All the gimmickry of the hotels can be stripped out. The problem simply becomes “what happens if a good or service can be provided at lower cost?” No one answer can be given. The details always depend on the details.

The dollar isn’t missing. The $100,000 difference gets spent somewhere on something. It’s possible that in the hotel case, that $100,000 is spent somewhere other than Middlesville, e.g., spent by the tourists in their home cities. It’s also possible that the $100,000 is spent in Middlesville on other goods and services because the tourists now have more disposable cash. It’s even possible that the lower price of hotel rooms causes them to divert more than $100,000 into the Middlesville economy since spending on restaurants and events is harder for tourists to track than a fixed hotel cost.

The point is that no conclusion is possible a priori. A real economic analysis would take the total ecosystem into account and not look at a slice. The best analogy I know is the economic impact of a sports stadium. The proponents always look at the money that will be spent at the stadium as the value of the deal. Virtually every study I’ve ever seen insists that to the contrary stadiums are extremely bad investments for a city because the dollars spent there are simply diverted from other forms of entertainment. Examining the flow of all the money is crucial.

Assume part of Bob’s efficiency advantage is reduced staffing. That’s not a negative for ‘the town’ necessarily. It is a negative for the people who lost their jobs (at least a primary result). I don’t make this distinction to be contentious. It’s pretty important to this type of analysis in the real world (like stadium projects as have been mentioned a couple of times as common real world analogs). The perceived cost/benefit often turns on who benefits, not just the (often hard to calculate) net benefit. And even aside from that, the same people can get different jobs. In the long run economic progress almost always requires people to lose jobs.

In this case if the other businesses in town saw an uptick in business due to more visitors or more disposable income from visitors, or even the general population saw a benefit in a more alive and bustling place, that might weigh heavier than a few people losing their jobs, even if they did not all get new jobs in Middlesville. And the degree of difficulty in getting another job in Middlesville, regionally and nationally would vary with broad economic conditions at a given time, hard to isolate it to one change in a business in one place. Right now in the US it’s pretty easy to get modest jobs like most hotel jobs, assuming already holding a job at Bob’s predecessor indicated general employability. Other times that is less true. In theoretical economic equilibrium efficiency gains don’t affect the level of employment, just the level of overall income and wealth (they increase it). And that has held true in real life in the long run (great majority of all jobs were in agriculture a century or two ago, almost all those jobs are gone now). In the short term in real life though it really depends, and on stuff beyond Middlesvile.