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EQUILIBRIUM IN TOURISM EQUILIBRIUM IN TOURISM MARKETSMARKETS

1.1. The establishment of The establishment of partial partial equilibriumequilibrium

2.2. The problemsThe problems of identifying equilibrium of identifying equilibrium in tourism in tourism

3.3. Factors Factors causing shiftscausing shifts in equilibrium in equilibrium4.4. Effects of Effects of taxation taxation on tourismon tourism5.5. Equilibrium and Equilibrium and price controlsprice controls6.6. The The dynamics dynamics of equilibrium in tourismof equilibrium in tourism

marketsmarkets

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1. 1. Establishment of Partial Establishment of Partial EquilibriumEquilibrium For each product in an economy there will For each product in an economy there will

be be (cet.par.)(cet.par.) a unique a unique equilibrium equilibrium market market price and quantity, representing a price and quantity, representing a partial partial equilibriumequilibrium in the in the aggregate economy.aggregate economy.

The sum of The sum of all partial equilibriumall partial equilibrium in an in an economy determines economy determines two thingstwo things::> > General equilibriumGeneral equilibrium (of all (of all interdependentinterdependent markets)markets)

> > The The allocation of resourcesallocation of resources to those who to those who are willing and able to pay, by methods are willing and able to pay, by methods using the most economic using the most economic inputs or factorsinputs or factors

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1.1. Establishment of Partial Establishment of Partial EquilibriumEquilibrium

In practice the operation of price mechanisms to achieve In practice the operation of price mechanisms to achieve

a market clearing equilibrium is a market clearing equilibrium is NOT simple. NOT simple.

There are There are monopolisticmonopolistic imperfectionsimperfections and restraints and restraints

on free trade in most markets; on free trade in most markets; governmentsgovernments and other and other

authorities intervene; and producers and consumers authorities intervene; and producers and consumers

rarely sell and buy with the perfect knowledge of rarely sell and buy with the perfect knowledge of

marketplaces that theories suggest they should have. marketplaces that theories suggest they should have.

Markets Markets are are dynamicdynamic rather than rather than staticstatic, so that , so that

constantly changing conditions may never permit the constantly changing conditions may never permit the

attainment of a attainment of a stablestable equilibrium position. equilibrium position.

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2. The problems of identifying 2. The problems of identifying equilibrium in tourismequilibrium in tourism

Identifying equilibrium in travel and Identifying equilibrium in travel and tourism markets poses tourism markets poses twotwo particular particular problemsproblems; ;

1.1. the the geographicalgeographical naturenature of the activity, of the activity,

2.2. divergentdivergent perception of the product by perception of the product by suppliers and tourists suppliers and tourists

For the For the firstfirst, the , the tourism market in any one tourism market in any one country is a country is a blendblend of of domesticdomestic and and internationalinternational demand, and demand, and

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2. 2. The problems of identifying equilibrium The problems of identifying equilibrium in tourismin tourism

The The international componentinternational component may well be may well be relatively relatively more significantmore significant than foreign trade than foreign trade in most goods relative to the economy's in most goods relative to the economy's domestic markets. domestic markets.

This complicates the supply relative to any This complicates the supply relative to any major major generating areagenerating area ((demanddemand),), and the and the demand relative to any demand relative to any destination areadestination area ((supplysupply). ).

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2. 2. The problems of identifying The problems of identifying equilibrium in tourismequilibrium in tourism

If there are If there are nn national economies in the world, the national economies in the world, the total number of travel and tourism "total number of travel and tourism "marketsmarkets" will be " will be n (n-1)n (n-1) international ones plus international ones plus(+)(+) nn domestic ones. domestic ones.

As an analogy to the principle of few major As an analogy to the principle of few major variables exercising the most understandable variables exercising the most understandable effect, for most economies there will be a relatively effect, for most economies there will be a relatively small number of significant tourism demand small number of significant tourism demand generators or tourism supplying destinations. generators or tourism supplying destinations.

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2. 2. The problems of identifying The problems of identifying equilibrium in tourismequilibrium in tourism

Assuming worldwide Assuming worldwide gg notable notable generatorsgenerators and and d'd' destinationsdestinations the total number of tourist markets is the total number of tourist markets is gd'gd' international plusinternational plus nn domestic. domestic.

Since demand conditions inevitably vary constantly Since demand conditions inevitably vary constantly between the between the (g)(g) generators, and supply conditions generators, and supply conditions vary between the vary between the d'd' destinations, any simple partial destinations, any simple partial equilibrium in travel and tourism is in practice equilibrium in travel and tourism is in practice difficult to arrive at.difficult to arrive at.

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2. The problems of identifying 2. The problems of identifying equilibrium in tourismequilibrium in tourism

DivergentDivergent perceptions of tourism between perceptions of tourism between supplierssuppliers and and consumersconsumers. .

Since most consuming tourists consider a Since most consuming tourists consider a business or a vacation trip as a business or a vacation trip as a singlesingle (and major)(and major) purchase, then it should be possible to identify a purchase, then it should be possible to identify a singlesingle, coherent, coherent (appropriate)(appropriate) demand side to demand side to establishing an equilibrium position. establishing an equilibrium position.

suppliers very often tend to view things suppliers very often tend to view things differentlydifferently, in the context of , in the context of individualindividual sectors sectors..

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Perceptions of the travel and tourism marketplacePerceptions of the travel and tourism marketplace

Supply Demand

• Carriers (Transportation)• Accommodation

Establishments• Attractions• Tourist Bureaus

• Travel• Accommodation• Activities• Information

• Travel and Tourism

Tourists

Tour Operators and Travel Agencies

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2. The problems of identifying 2. The problems of identifying equilibrium in tourismequilibrium in tourism

One way toOne way to resolve resolve the divergence the divergence is to assume that demand for each is to assume that demand for each of the of the sectoralsectoral productsproducts -- attractionsattractions, lodging, lodging and so on - is a and so on - is a derived demand emanating from derived demand emanating from overall tourism industry marketsoverall tourism industry markets. .

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The problems of identifying The problems of identifying equilibrium in tourismequilibrium in tourism

The result is that disequilibrium in one The result is that disequilibrium in one sector may easily, via overall tourism sector may easily, via overall tourism markets, cause markets, cause disequilibriumdisequilibrium in in others; hotel accommodation others; hotel accommodation shortages in a destination can mean shortages in a destination can mean airlines lose demand on routes to that airlines lose demand on routes to that destination, and the reverse is equally destination, and the reverse is equally true. true.

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Figure 4.2:Figure 4.2: Equilibrium in tourism Equilibrium in tourism

PricePrice DD

SS

PePe

QuantityQuantityQeQe QcQc

SS11DD11

00

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3. Factors causing shifts in 3. Factors causing shifts in equilibriumequilibrium

Figure 4.2 assumes a assumes a short-runshort-run situation in which demand for situation in which demand for tourism in a destination market in tourism in a destination market in totaltotal DDDD11 reflects price "reflects price "stickinessstickiness” ” caused by differentiated productcaused by differentiated product attributes andattributes and imperfectlyimperfectly competitivecompetitive suppliers. suppliers.

Supply Supply SSSS11 reached capacity reached capacity quantity atquantity at QQcc, , and the load factor or and the load factor or occupancy rate isoccupancy rate is 0Qe/0Qc0Qe/0Qc %% at an at an equilibrium price level ofequilibrium price level of PPee..

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3. Factors causing shifts in 3. Factors causing shifts in equilibriumequilibrium

If there were sufficiently long If there were sufficiently long horizontal sections of both the horizontal sections of both the demand and supply schedules at demand and supply schedules at PPee, it is possible that there would , it is possible that there would be no unique equilibrium quantity be no unique equilibrium quantity QQee,, but rather a range of quantities but rather a range of quantities which could be regarded as which could be regarded as satisfying equilibrium.satisfying equilibrium.

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4. 4. Effects of taxation on Effects of taxation on tourismtourism

Government frequentlyGovernment frequently impose (reduce or impose (reduce or remove) remove) taxationtaxation on tourism products, both to on tourism products, both to raise revenue and to discourage or encourage raise revenue and to discourage or encourage the consumption of particular types of tourism. the consumption of particular types of tourism.

Some examples are:Some examples are:> > Airport departure taxAirport departure tax> > "Bed" tax (hotel room tax)"Bed" tax (hotel room tax)> > Permits for entry to destinations areasPermits for entry to destinations areas> > Entry or transit visasEntry or transit visas> > Exit visasExit visas> > Duty free goods (tax reduction or removal)Duty free goods (tax reduction or removal)

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4. 4. Effects of taxation on Effects of taxation on tourismtourism

These types of tax may change the These types of tax may change the price of the price of the tourism industry tourism industry productproduct. .

The amount of the price change will The amount of the price change will depend on the depend on the type of tax type of tax and its and its incidenceincidence (rate). (rate).

Any tax on something falls directly on Any tax on something falls directly on purchasers, with the total price of the purchasers, with the total price of the tourism product increasing by the full tourism product increasing by the full free amount. free amount.

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Figure 4.3Figure 4.3 Effect of Taxation on equilibrium in tourism marketEffect of Taxation on equilibrium in tourism market

D D SS11/S/S

QuantityQuantity

PricePrice

00 QeQeQtQt QFQF

SSDD11

SS11PsPs

PePe

PtPt

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4. Effects of taxation on 4. Effects of taxation on tourismtourism

However, However, sellers may sellers may not be able not be able to passto pass onon the the full taxfull tax amount to buyers unless amount to buyers unless demand is totally demand is totally inelasticinelastic. .

This is demonstrated in This is demonstrated in the figure above. the figure above. To consumers, supply To consumers, supply SSSS11 shifts upwards shifts upwards toto SS**SS**11 to reflect the to reflect the impositionimposition of a tax of a tax such as such as bed taxbed tax. .

The The new equilibrium positionnew equilibrium position depends on depends on the the elasticity of demandelasticity of demand over the range over the range under consideration. under consideration.

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4. Effects of taxation on 4. Effects of taxation on tourismtourism

If demand is relatively inelastic, hoteliers are able If demand is relatively inelastic, hoteliers are able to to pass on most or all of the tax in higher pass on most or all of the tax in higher ratesrates; but with ; but with elasticelastic demand, they will be demand, they will be forced forced to to absorbabsorb the taxthe tax themselves in order to themselves in order to compete.compete.

ResearchResearcheses ha haveve found, as shown in the example found, as shown in the example above above that the incidence of such tax tends to be that the incidence of such tax tends to be sharedshared between suppliers and tourists. between suppliers and tourists.

Here tourists are paying Here tourists are paying Pt – PePt – Pe extra, and extra, and suppliers absorb suppliers absorb Pe - PsPe - Ps, now receiving, now receiving PsPs as net as net price.price.

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5. Equilibrium and price 5. Equilibrium and price controlscontrols

Not Not many examples of intervention to many examples of intervention to controlcontrol prices prices in tourism in tourism

However, in some However, in some occasions occasions governments governments intervene in specific sectors to intervene in specific sectors to establishestablish setset prices, price prices, price bandsbands or or maximummaximum or or minimumminimum prices. prices.

Domestic airfaresDomestic airfares in many countries are still in many countries are still controlled, lodging rates may be price-banded in controlled, lodging rates may be price-banded in line with line with compulsory classification systemscompulsory classification systems, and , and of course foreign exchange is frequently subject of course foreign exchange is frequently subject to controlled rates. to controlled rates.

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5. Equilibrium and price 5. Equilibrium and price controlscontrols

There is no problem when controlled prices There is no problem when controlled prices are line with what a free market equilibrium are line with what a free market equilibrium would set; but where this is not true, an would set; but where this is not true, an excessexcess demand or demand or oversupplyoversupply can result. can result.

Assume Assume that international tourists visit a that international tourists visit a country whose country whose the the currencycurrency is fixed is fixed artificiallyartificially high. Tourists are high. Tourists are unwillingunwilling to to convert as much of their home currency, convert as much of their home currency, say say dollarsdollars, as they would like because of , as they would like because of the high rate. the high rate.

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5. Equilibrium and price 5. Equilibrium and price controlscontrols

This is demonstrated in This is demonstrated in the the figure below, figure below, where the where the would-be free market would-be free market equilibrium supply and equilibrium supply and demand for demand for domestic domestic currencycurrency (for tourist (for tourist purposes) is shown at purposes) is shown at PPee..

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Figure 4.4.Figure 4.4. The Effect of an artificially high controlled The Effect of an artificially high controlled tourism exchange ratetourism exchange rate

PricePrice

DD SS

PcPc

PePe

Pb Pb

QuantityQuantity00 Q1Q1 Q2Q2

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5. Equilirium and price 5. Equilirium and price controls (figure)controls (figure)

If the controlled exchange rate is held at If the controlled exchange rate is held at PPcc currenciescurrencies to the to the dollardollar,, there is an there is an ““oversupplyoversupply” of ” of zilcheszilches (currency of the country)(currency of the country) in the sense that tourists are only prepared in the sense that tourists are only prepared to buy to buy QQ11 currenciescurrencies with their dollars, and with their dollars, and QQ22 - Q - Q11 represents an unfulfilled represents an unfulfilled willingness by suppliers in the destination willingness by suppliers in the destination country to “country to “earnearn” more tourist dollars. ” more tourist dollars.

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5. Equilirium and price 5. Equilirium and price controls (figure)controls (figure)

This oversupply in the official This oversupply in the official foreign exchange market may be foreign exchange market may be countered by a black market trade. countered by a black market trade.

To balance the oversupply of To balance the oversupply of QQ2 2 - - QQ11, a black market rate of , a black market rate of PPbb would be required to create extra would be required to create extra demand for demand for QQ2 2 - Q- Q11 currenciescurrencies by by tourists.tourists.

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6. The Dynamics of Equilibrium 6. The Dynamics of Equilibrium in Tourismin Tourism

Equilibrium Equilibrium in in tourism industry tourism industry is not a is not a static position, but changes over time. static position, but changes over time.

shifts in the short runshifts in the short run,, and processes of and processes of long term tourism developmentlong term tourism development. .

Assume a Assume a short run situationshort run situation where where tourism industry tourism industry suppliers have suppliers have no clear no clear ideaidea of likely coming of likely coming seasonal demandseasonal demand for their products. They may attempt to for their products. They may attempt to raiseraise prices prices to to fill capacityfill capacity, but find that , but find that demand falls very short at those prices. demand falls very short at those prices.

How can this market approach How can this market approach equilibrium? equilibrium?

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6. The Dynamics of Equilibrium in 6. The Dynamics of Equilibrium in TourismTourism

Given the pressure exerted (forced) on Given the pressure exerted (forced) on producers by producers by cost structurescost structures to to supply at or near full capacity, supply at or near full capacity, tourism tourism industry industry markets tend to exhibit markets tend to exhibit conditions leading to stability in the conditions leading to stability in the short run. short run.

That is, adjustments are made through That is, adjustments are made through the the price systemprice system rather than rather than supplierssuppliers attempting to attempting to changechange quantitiesquantities supplied. supplied.

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6. The Dynamics of Equilibrium in 6. The Dynamics of Equilibrium in TourismTourism

In this case In this case fares, room ratesfares, room rates and and so onso on may be cut, but at the same may be cut, but at the same time seasonal demand increases time seasonal demand increases produce an produce an excessexcess demanddemand. .

Suppliers respond, probably after Suppliers respond, probably after an adjustment lagan adjustment lag (slow (slow development), by raising prices development), by raising prices again , but once again these again , but once again these may may not find equilibriumnot find equilibrium. .

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Figure 4.5 :Figure 4.5 : Dynamic cobweb of lagged Dynamic cobweb of lagged adjustment in tourism marketsadjustment in tourism markets..

PricePrice

DemandDemand SupplySupply

PP11 2 2 33 6 6 7 7

99 8 8 PP22 55 44 PP33 11

OutputOutputQ1Q1Q2Q2 Q3Q300

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6. The Dynamics of Equilibrium in 6. The Dynamics of Equilibrium in TourismTourism

Given relatively Given relatively inelasticinelastic supply, supply, the result is a standard cobweb of the result is a standard cobweb of oscillations, as depicted in the figure oscillations, as depicted in the figure above above leading to a leading to a stablestable equilibriumequilibrium ((or rather a set of or rather a set of equilibrium for different seasonsequilibrium for different seasons), at ), at least until seasonal patterns change.least until seasonal patterns change.

With the original price level at With the original price level at PP11 in in the expectation of demand the expectation of demand QQ11,, tourists actually demand only tourists actually demand only QQ22. .

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6. The Dynamics of Equilibrium in 6. The Dynamics of Equilibrium in TourismTourism

When this happens, suppliers When this happens, suppliers adjust price to adjust price to PP22 which which stimulates demand. stimulates demand.

Provided supply is inelastic Provided supply is inelastic compared with demand, the compared with demand, the oscillationsoscillations ( (fluctuationsfluctuations) ) progressively reduce to a progressively reduce to a stable stable short run equilibriumshort run equilibrium..

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