President Barack Obama is currently taking a two week vacation on Martha’s Vineyard, a small island off the coast of New England. My wife and I took a short vacation on the same island and left a few days before the President and his entourage landed. The island has lovely scenery, warm water and many quiet places to relax. The island also is very expensive. While I didn’t do a professional survey since I was on vacation it seemed that almost all prices I paid were about 50% higher than what exists 45 minutes away on the mainland. On the ferry back to the mainland I came up with three reasons why Martha’s Vineyard and other island getaways like Nantucket are so expensive.
1) Businesses on these islands might be trying to make a year’s worth of revenue in just two or three months. On many island getaways the season is short. During the summer lots of people show up. During the winter almost no one but the residents live there. The Martha’s Vineyard Chamber of Commerce estimates that during the winter there are 15,000 people living on the island and 115,000 during the summer. Running a business is expensive because taxes, rent and utilities have to be paid for 12 months a year, even if customers don’t show up for 9 of those months. By setting high prices companies can potentially make enough money in 3 months to tide them over for the 9 lean months.
I don’t think this is the complete reason why prices are higher. The Gay Head Lighthouse on the western most tip of the Vineyard is a very famous tourist attraction and is one place to go to see stunning sunsets when on the island. Beside the lighthouse there are a number of shops selling ice-cream, fish and chips and souvenirs. Dusk is a favorite time to visit but the one shop that sells ice-cream closes at 4pm on most days and 5 pm on weekends. If businesses were trying to maximize revenue during the summer, they would stay open extra late during the peak tourist season. It is not just the ice cream stand at the lighthouse. I stopped in for pizza at a shop next to the ferry before leaving the island. They took their last order at 9 pm and closed even though there were many people still showing up wanting to order.
2) Businesses have to boost their costs to cover higher shipping and labor. Martha’s Vineyard is an island and the cheapest way to get items to the island is on a boat. The ferry takes 45 minutes each way and for tourists the price is fairly high. However, for island residents there are special 10 trip packages which lower the cost to about $135 per round trip for a car or small truck. Given it is possible to buy items in bulk, the time and out of pocket expenses for making trips to the mainland mean prices should be higher, but not that much. Moreover, looking at various company rate charts, which show how much it costs to ship large packages, suggests there is no extra fee for sending a box to either the closest point to Martha’s Vineyard on the mainland or to the island itself. This suggests that shipping costs do not fully explain the reason for higher prices.
This still leaves the possibility that wages are much higher on the Vineyard. Reading the local newspaper, confirms that low skill jobs are paid more on the Vineyard. The difference between paying staff $8 per hour on the mainland compared to $12 per hour on the Island is a large percentage difference. However, higher wages do not fully explain the story because selling even a small number of items can fully pay for the extra wages. As a simple example, we bought a pie for dinner at the local bakery. The pie was quite good but it cost $20. A similar pie on the mainland was about $10. Selling just three pies each day would pay for the higher wage cost but the bakery was clearly selling far more pies than the three needed to cover the higher labor bill.
3) The people who go to the Vineyard or other getaways on vacation are not price sensitive and often don’t look at prices. Instead, they expect to pay a lot and do not cut back their purchases while on holiday. My guess is for non-economists vacation time is when splurging is okay. Paying for the vacation’s bills comes afterwards. This idea is the hardest one to prove or disprove but even I found myself occasionally rationalizing paying very high prices with the thought that I was “on vacation.”
I don’t have data to determine what is the true reason why island vacation spots have such high prices. My guess is that all three are part of the explanation with #3 (not being price sensitive) being the most important reason, followed by #1 (trying to cover 12 months of fixed costs in a short season) and #2 (higher shipping and labor costs) bringing up the rear.