by Simon Sarevski

Tonight, Kyiv, Ukraine will host the twenty-sixth (or sixty-third, depending on how you count – both are correct) Champions League final between Liverpool and Real Madrid. Reading newspapers about the glorious night that awaits, how the squads of both teams will stack up, which club has an advantage over the other, and what not, one can’t avoid the news of skyrocketing prices for accommodation during the event in Ukraine’s capital city. Both Liverpool and Real Madrid fans have been quite vocal about the costs for a two-night weekend ranging between £1000 and £9000, rather than the usual £80. Accompanied by these skyrocketing prices are the arrangement cancellations, usually by excuses like flooding, virus attacks, no electricity or water during the time the event is to take place, with the sole purpose of reopening the same hotels and hostels for the willing costumers, albeit illegally or on the low key. These activities might come as a surprise to many, but similar things occur on regular basis – just take last year’s  Super Cup between Manchester United and Real Madrid, taking place in Skopje, Macedonia, as an example.

Why do prices rise?

When markets are free, prices can rise due to two reasons: negative shocks on the supply side (recall the oil crisis of the 1970s) which in turn means the same amount of people are chasing fewer goods, or positive shocks on the demand side when, as is our case, more people are chasing the same amount of goods.

In the long run, though, both problems can be solved, albeit not perfectly, on the supply side by readjusting the consumption or by substitution, or on the demand side by changing production to the now high profit margin products. However, in the short run these solutions are not existent. As unpleasant as it might be, in such situations the only thing left for people to do is either to accept the higher prices or stop consuming the goods in question altogether.

Most people, if not everyone, understand this, however, as was the case in Skopje last year, people were disgruntled by the fact that the prices rose by a factor of more than fifteen, not merely fifteen percent. The question is, however, whether prices really rose that much? While it is true that such high prices have popped up, this is only one part of the story, looking at the extremes, while neglecting the vast majority of offerings.. As we all know, bad news sell and in the age of click-bait it is only natural for bombastic headlines.

There are  several reasons I would argue that in reality, prices did not rise by that high an amount (sadly, no median prices seem to be measured – what a surprise). For one, while for some a soccer game is a one-off opportunity for making a maximum amount of money, for others it is surely not. Imagine you are operating a low level small scale hotel with little to no reputation. Even by ‘ripping off’ the costumers during this one-time event, this won’t hurt your future prospects too much. But imagine you’re in charge of a high-end hotel. For you, this is not a one-time event. You are not competing merely in Skopje but on a much grander scale (wherever you have or plan to open a hotel). Getting bad reputation, in the age of where information travels at astounding speed, this bad reputation could be detrimental. (The same logic follows with services like AirBnB – if you open the doors just this one time, you don’t mind the consequences, unlike if this is a regular gig of yours.)

In addition, while demand skyrocketed, so did the supply, albeit not with same intensity. The modern gig-economy (AirBnb, Booking) allowed people to open up the doors to their homes for some extra cash. At the same time, the major cities in the area of Skopje, such as Sofia, Nish and Pristina accommodated some of the fans that were willing to travel a bit longer for some monetary savings.

Let’s also not forget, the visiting fans were coming mainly from Madrid and Manchester, cities where the purchasing power is several times higher than Macedonia’s. Were they to come from places similar to Macedonia vis purchasing power the price surge would have been lower.

Lastly, downward pressure on the prices came from unlikely places – the Macedonian fans opened their doors to the foreign fans, offering free lodging. Same offers can be seen this year in Kyiv as well.

Conclusion

The market process is a discovery process and the equilibrium price is not a static point that can be found on a graph. When supply and demand side shocks occur prices skyrocket.  In turn, this new high profit margin opens up the market for new entrants – the freer the market the faster this transition happens. Unlike the free market, government regulation in the name of consumer protection would be very costly (for both sides), very rigid, and frankly, very wrong. The fact that the accommodation capacities were fully booked speaks volumes. And, as we have seen, there is no point in panicking: looking at the overall situation shows that prices were and probably are skyrocketing much less than is believed.

Simon Sarevski holds a Bachelor’s degree in financial management from Ss. Cyril and Methodius, and is involved with European Students for Liberty.

The views expressed on AustrianCenter.com are not necessarily those of the Austrian Economics Center.