Download EQUILIBRIUM IN TOURISM MARKETS

EQUILIBRIUM IN TOURISM
MARKETS
1.
2.
3.
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6.
The establishment of partial
equilibrium
The problems of identifying equilibrium
in tourism
Factors causing shifts in equilibrium
Effects of taxation on tourism
Equilibrium and price controls
The dynamics of equilibrium in tourism
markets
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1. Establishment of Partial Equilibrium
 For
each product in an economy there will
be (cet.par.) a unique equilibrium market
price and quantity, representing a partial
equilibrium in the aggregate economy.
 The sum of all partial equilibrium in an
economy determines two things:
> General equilibrium (of all interdependent
markets)
> The allocation of resources to those who
are willing and able to pay, by methods
using the most economic inputs or factors
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1. Establishment of Partial Equilibrium
In practice the operation of price mechanisms to achieve
a market clearing equilibrium is NOT simple.

There are monopolistic imperfections and restraints
on free trade in most markets; governments and other
authorities intervene; and producers and consumers
rarely sell and buy with the perfect knowledge of
marketplaces that theories suggest they should have.

Markets are dynamic rather than static, so that
constantly changing conditions may never permit the
attainment of a stable equilibrium position.
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2. The problems of identifying equilibrium in
tourism

1.
2.

Identifying equilibrium in travel and
tourism markets poses two particular
problems;
the geographical nature of the activity,
divergent perception of the product by
suppliers and tourists
For the first, the tourism market in any one
country is a blend of domestic and
international demand, and
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2. The problems of identifying equilibrium in tourism
 The
international component may well be
relatively more significant than foreign trade
in most goods relative to the economy's
domestic markets.
 This
complicates the supply relative to any
major generating area (demand), and the
demand relative to any destination area
(supply).
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2. The problems of identifying equilibrium in
tourism

If there are n national economies in the world, the
total number of travel and tourism "markets" will be
n (n-1) international ones plus(+) n domestic ones.

As an analogy to the principle of few major
variables exercising the most understandable
effect, for most economies there will be a relatively
small number of significant tourism demand
generators or tourism supplying destinations.
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2. The problems of identifying equilibrium in
tourism

Assuming worldwide g notable generators and d'
destinations the total number of tourist markets is
gd' international plus n domestic.

Since demand conditions inevitably vary constantly
between the (g) generators, and supply conditions
vary between the d' destinations, any simple partial
equilibrium in travel and tourism is in practice
difficult to arrive at.
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2. The problems of identifying equilibrium
in tourism

Divergent perceptions of tourism between
suppliers and consumers.

Since most consuming tourists consider a
business or a vacation trip as a single (and major)
purchase, then it should be possible to identify a
single, coherent (appropriate) demand side to
establishing an equilibrium position.

suppliers very often tend to view things
differently, in the context of individual sectors.
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Perceptions of the travel and tourism marketplace
Supply
•
•
•
•
Carriers (Transportation)
Accommodation
Establishments
Attractions
Tourist Bureaus
Demand
•
•
•
•
Travel
Accommodation
Activities
Information
•
Travel and
Tourism
Tourists
Tour Operators and Travel Agencies
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2. The problems of identifying equilibrium
in tourism
 One
way to resolve the divergence
is to assume that demand for each
of the sectoral products attractions, lodging and so on - is a
derived demand emanating from
overall tourism industry markets.
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The problems of identifying equilibrium in
tourism
 The
result is that disequilibrium in one
sector may easily, via overall tourism
markets, cause disequilibrium in
others; hotel accommodation
shortages in a destination can mean
airlines lose demand on routes to that
destination, and the reverse is equally
true.
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Figure 4.2: Equilibrium in tourism
Price
D
S
Pe
S1
0
D1
Qe
Qc
Quantity
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3. Factors causing shifts in equilibrium
 Figure
4.2 assumes a short-run situation in
which demand for tourism in a destination
market in total DD1 reflects price
"stickiness” caused by differentiated
product attributes and imperfectly competitive
suppliers.
 Supply SS1 reached capacity quantity at Qc,
and the load factor or occupancy rate is
0Qe/0Qc % at an equilibrium price level of
Pe.
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3. Factors causing shifts in equilibrium
 If
there were sufficiently long horizontal
sections of both the demand and supply
schedules at Pe, it is possible that there
would be no unique equilibrium quantity
Qe, but rather a range of quantities which
could be regarded as satisfying
equilibrium.
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4. Effects of taxation on tourism


Government frequently impose (reduce or
remove) taxation on tourism products, both to
raise revenue and to discourage or encourage
the consumption of particular types of tourism.
Some examples are:
> Airport departure tax
> "Bed" tax (hotel room tax)
> Permits for entry to destinations areas
> Entry or transit visas
> Exit visas
> Duty free goods (tax reduction or removal)
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4. Effects of taxation on tourism
 These
types of tax may change the
price of the tourism industry product.
 The amount of the price change will
depend on the type of tax and its
incidence (rate).
 Any tax on something falls directly on
purchasers, with the total price of the
tourism product increasing by the full
free amount.
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Figure 4.3 Effect of Taxation on equilibrium in tourism market
Price
D
S1/S
Pt
Pe
Ps
S1
D1
S
0
Qt
Qe
QF
Quantity
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4. Effects of taxation on tourism
 However,
sellers may not be able to pass
on the full tax amount to buyers unless
demand is totally inelastic.
 This is demonstrated in the figure above.
To consumers, supply SS1 shifts upwards
to S*S*1 to reflect the imposition of a tax
such as bed tax.
 The new equilibrium position depends on
the elasticity of demand over the range
under consideration.
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4. Effects of taxation on tourism

If demand is relatively inelastic, hoteliers are able
to pass on most or all of the tax in higher
rates; but with elastic demand, they will be
forced to absorb the tax themselves in order to
compete.
 Researches have found, as shown in the example
above that the incidence of such tax tends to be
shared between suppliers and tourists.
 Here tourists are paying Pt – Pe extra, and
suppliers absorb Pe - Ps, now receiving Ps as net
price.
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5. Equilibrium and price controls

Not many examples of intervention to control
prices in tourism
 However, in some occasions governments
intervene in specific sectors to establish set
prices, price bands or maximum or minimum
prices.
 Domestic airfares in many countries are still
controlled, lodging rates may be price-banded in
line with compulsory classification systems, and
of course foreign exchange is frequently subject
to controlled rates.
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5. Equilibrium and price controls
 There
is no problem when controlled prices
are line with what a free market equilibrium
would set; but where this is not true, an
excess demand or oversupply can result.
 Assume
that international tourists visit a
country whose the currency is fixed
artificially high. Tourists are unwilling to
convert as much of their home currency,
say dollars, as they would like because of
the high rate.
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5. Equilibrium and price controls
 This
is demonstrated in the figure
below, where the would-be free market
equilibrium supply and demand for
domestic currency (for tourist
purposes) is shown at Pe.
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Figure 4.4. The Effect of an artificially high controlled
tourism exchange rate
Price
D
S
Pc
Pe
Pb
0
Quantity
Q1
Q2
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5. Equilirium and price controls (figure)
 If
the controlled exchange rate is held at
Pc currencies to the dollar, there is an
“oversupply” of zilches (currency of the country)
in the sense that tourists are only prepared
to buy Q1 currencies with their dollars, and
Q2 - Q1 represents an unfulfilled
willingness by suppliers in the destination
country to “earn” more tourist dollars.
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5. Equilirium and price controls (figure)
 This
oversupply in the official foreign
exchange market may be countered by a
black market trade.
 To balance the oversupply of Q2 - Q1, a
black market rate of Pb would be required
to create extra demand for Q2 - Q1
currencies by tourists.
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6. The Dynamics of Equilibrium in Tourism
 Equilibrium
in tourism industry is not a static
position, but changes over time.
 shifts in the short run, and processes of long
term tourism development.
 Assume a short run situation where tourism
industry suppliers have no clear idea of likely
coming seasonal demand for their products.
They may attempt to raise prices to fill capacity,
but find that demand falls very short at those
prices.
 How can this market approach equilibrium?
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6. The Dynamics of Equilibrium in Tourism
 Given
the pressure exerted (forced) on
producers by cost structures to supply at
or near full capacity, tourism industry
markets tend to exhibit conditions leading
to stability in the short run.
 That is, adjustments are made through the
price system rather than suppliers
attempting to change quantities supplied.
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6. The Dynamics of Equilibrium in Tourism
 In
this case fares, room rates and so on
may be cut, but at the same time seasonal
demand increases produce an excess
demand.
 Suppliers respond, probably after an
adjustment lag (slow development), by
raising prices again , but once again these
may not find equilibrium.
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Figure 4.5 : Dynamic cobweb of lagged
adjustment in tourism markets.
Price
Demand
Supply
P1
2
3
6
9
P2
5
P3
7
8
4
1
0
Q2
Q3
Q1
Output
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6. The Dynamics of Equilibrium in Tourism
 Given
relatively inelastic supply, the result
is a standard cobweb of oscillations, as
depicted in the figure above leading to a
stable equilibrium (or rather a set of
equilibrium for different seasons), at least until
seasonal patterns change.
 With the original price level at P1 in the
expectation of demand Q1, tourists actually
demand only Q2.
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6. The Dynamics of Equilibrium in Tourism
 When
this happens, suppliers adjust price
to P2 which stimulates demand.
 Provided supply is inelastic compared with
demand, the oscillations (fluctuations)
progressively reduce to a stable short run
equilibrium.
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End of Slides
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