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Market Structures
Three types of markets in tourism sector
I. Perfect and Pure Competition
II. Monopolies
III. Oligopoly and other imperfect competition
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I. Perfect Competition
 Perfectly competitive markets
From the seller’s point of view:
 the situation where that seller is faced with a market-set price
level...
they can sell all their output at that price; that is, the seller faces
a horizontal individual demand schedule (curve)
But, they cannot attempt to sell at a higher price since buyers
would immediately move to other -perfect - substitutes.
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I.
Perfect Competition
Individual enterprise’s demand in perfect competition
Price
per unit
P1
Quantity of
enterprise’s product
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I. Perfect Competition
 This situation is rarely related to industries other than
agriculture, where many small producers are ‘price
takers but quantity makers’.
 The situation nearest to this in travel and tourism may
be taxi operators in major cities, or small motels or
hotels in very large holiday destinations.
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I. Perfect Competition
 However, there may be an acceptable price band
within which sellers will operate, as on their own
they do not possess enough power in the market
place, nor quite enough individuality to set prices at
any level they wish.
 This is a form of imperfect competition, close to
pure competition.
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Perfect Competition: Sample demand schedule for small motel in
imperfect competition
Price
per unit
Pm
0
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Qf
Quantity of rooms
I. Perfect Competition
 From the figure;
 Pm is the effective maximum price that the motel can
charge before finding that its product attributes can no
longer outweigh the cheaper rates of its rivals.
 QF is full capacity – every unit occupied.
 The stepped demand schedule shows the range of price
variation open to the motel (stepped nature assuming ‘sticky’ demand
in response to small price changes).
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I. Perfect Competition
 While this structure describe well-defined competitive
sectors within destinations, such as taxi services, motels
and souvenir outlets
 market structures in travel and tourism generally are
complicated by:
 the difficulty of defining products, and hence sectors
 the geographical bounds of markets and location of
producers and consumers, especially where international
tourism is involved.
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I. Perfect Competition
 Many enterprises transcend national frontiers, and
may operate in different market structures within
different countries
 It is therefore necessary to consider the effects of
market structure on travel and tourism enterprises
within each consuming market, and if possible for each
variety of group of products as well.
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II. Monopoly
* A monopoly can be said to exist when the substitutes are:
 not available at the time required or
 not price-attainable by consumers or
 sufficiently different in their attributes to be regarded as
unsatisfactory in meeting consumer demand objectives.
* A monopolist has the opportunity to set price or prices
only with regard to its own enterprise’s costs and
objectives, and in the light of market demand.
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II. Monopoly
 Lack of competition allows freedom in decision making,
and for this reason many enterprises seek monopolistic
trading positions. It is often relatively easy to do this in
travel and tourism where products can be differentiated:
 in fact, by service, locational or other characteristics
 in consumers’ perceptions, especially of untried travel
and tourism services, by sophisticated product-positioning
promotion.
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II. Monopoly
Another major strategy open to a monopolist is price
discrimination- the setting of different prices to different
market segments. Classically, this is possible only
 where market segmentation can take place,
 and where products are buyer-specific
 Example: a carrier (an airline) identifies business
travelers and leisure tourists as its two main market
segments on a particular route.

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II. Monopoly
 The business travelers may have to make their trips,
hence demand is rather inelastic, whereas
recreational tourism may be more optional and
hence price-elastic.
 Classical economic theory dictates that to obtain
profit maximization, the airline should fix fares to
equate the levels of marginal revenue in the two
markets.
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II. Monopoly: Fares set by price-discriminating airline
Fare
A
P1
C
P2
B
Q1
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Q2
Quantity of seats sold
II. Monopoly
 If demand in the two markets is aggregated
 the line AB represents the demand schedule for Business Travel
 the line CD the additional Leisue Travel demand
 P1 represents the airfare for business travelers and
 P2 that for vacationers.
 the corresponding quantities of seats Q1 and Q2 are sold to business travelers
and vacationers respectively
 the airline's total revenue is P2Q2 + (P1 – P2)Q1, whereas by selling all at
fare P1 it would only make P1Q1. The extra ‘bite’ of revenue cuts into
consumers’ surplus
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III. Oligopoly
Oligopoly is a market structure where;
 supply is completely or predominantly controlled by a
small number of enterprises.
 each firm has a substantial market share,
 will be sensitive to each others supply decisions and
 may or may not compete intensively.
In such sectors there is said to be a high degree of
concentration of enterprises.
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III. Oligopoly
 Profit or revenue maximizers often face a 'kinked'
demand schedule
 where an enterprise currently selling quantity of
output (Q1) at a certain price (P1)
it is faced with an inelastic demand should if it
decreases its prices, but
elastic demand if it increases them.
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An oligopolist’s ‘kinked’ demand schedule
Price
A
P1
B
C
Q1
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Quantityof output
III. Oligopoly
 Competitors match quickly any price reductions, as their market
shares would otherwise be eroded (lost)
 If the enterprise raises price above P1, since others will not follow, it
loses market share to its now cheaper competitors.
 This explains 'stickiness' of prices in oligopolistic markets; however,
imperfect consumer perceptions and differences in product
characteristics often allow some price variation without retaliation
(any response by competitors).
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III. Oligopoly
 This situation is common in travel and tourism markets.
 For example, to Northern Europeans, there is a small
number of competitive countries which may be regarded
as sun, sea and sand destinations at inexpensive prices.
 Each country keeps a close eye on the others’ tourism
products, marketing activity, prices and comparative exchange
rates.
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III. Oligopoly
 The worldwide international market for car rental is
dominated by not more than half-a-dozen firms, including
Avis, Budget, Europcar/National and Hertz.
 These firms have demonstrated extreme sensitivity to
competitive activity from each other, and consequently end
up with very similar product lines and tariff rates; this
ensures market stability.
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III. Oligopoly
 To avoid a ‘price war’ oligopolists may overtly, or covertly,
agree not to compete on price and possibly agree to
restrict competition further with quota or market-sharing
arrangements.
 Such an agreement, if overt, is a cartel, and is generally
not permitted by national governments and it is
considered to restrain free trade.
 However, these type of activities are still frequently found
in travel and tourism.
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Assignment
You are supposed to enter web pages to search for monopolistic,
oligopolistic or (if exists) competitive firms and sectors in
tourism.
The web pages can be searched on;
- Car rental companies (easycar)
- Hotel firms (HRS)
- Airlines (Travelocity, Expedia, Tripadviser etc.)
All price (fare, charge, rate) searches should be based on product
homogenity (similar characteristics).
The objective is to identify price differences or similarities.
Submit a short report to lecturer ([email protected])
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