An economic model for tourism destinations: product sophistication and price coordination

Transcription

1 An economic model for tourism destinations: product sopistication and price coordination Rainer Andergassen, Guido Candela and Paolo Figini Department of Economics, University of Bologna, Piazza Scaravilli 2, Bologna, Italy Abstract Te paper models te optimal development strategy of a tourism destination by identifying and analyzing two key economic features: i) te long-term coice of weter to invest in te enancement of natural and/or cultural resources (wic act as common goods in te destination) or to increase te degree of sopistication of te tourism product (ere intended as te variety of complementary services to accommodation tat are demanded by tourists); ii) te sort-term coice of weter or not to implement price coordination among local rms, a problem stemming from te anticommon nature of te tourism product. We build a two-stage model for te tourism destination, tus identifying te optimal degree of sopistication of te tourism product and te optimal institutional arrangement in terms of coordination. Tis approac elps sedding ligt on te rationale underlying te development pat taken by dierent destinations, tus overcoming some of te limits of te existing literature and providing a simple taxonomy for te observed diversity of real-world destinations. Accordingly, we provide a classication of destinations based on te type of coordination and on weter te primary resource is natural, cultural or organizational. Keywords: Tourism destination; product variety; natural resources; price coordination; development strategy JEL: L83; O1; D11 An economic model for tourism destinations: product sopistication and price coordination Corresponding autor. paolo.gini@unibo.it. Te autors tank Mattias Fucs, Laurent Botti, Sauveur Giannoni, participants to te 3rd QATEM worksop, eld in Corte (France) on 13 July 2012 and to te 1st International Conference on Tourism Management and Tourism Related Issues, eld in Rimini (Italy) on September 2011 for useful comments on previous versions of te paper. Te usual disclaimers apply. 1

2 1 Introduction Researc in tourism studies as establised te tourism destination (TD) as one of its key concepts, and nowadays many investigations pivot around te organization, te management, te development, and te sustainability of tourism destinations. From te researcer's perspective, te TD embodies all te specic and problematic features of tourism, suc as its systemic nature, in wic space plays a fundamental role (Leiper, 1990). In fact, tourism supply meets demand in te destination; environmental and cultural resources, attractions, te ospitality industry are all located in te destination; tourism demand is revealed in te destination. In oter words, te TD is te conceptual link between te complexity of te sector, te complementarities and substitutabilities of te many goods and services composing te tourism product, and te supply of territory. Several dierent denitions exist for te TD, ranging from management studies, were it is mainly interpreted as a product, to tourism geograpy were te destination is intended as te oer of territory. In te present paper we consider te destination from te economics perspective, as a kind of (meta) economic agent: a territorial system supplying at least one tourism product able to satisfy te complex needs of tourism demand (Candela & Figini, 2012). Te term "tourism product" denes wat te common language calls oliday, or wat tourism sociology calls te tourist's experience. But, were is te economics of destinations in te tourism literature? Altoug its specic features are indeed discussed by oters disciplines, suc as geograpy, management, marketing and organizational studies, te study of te TD from te economics perspective is in its infancy, and neiter te micro nor te macroeconomic existing literature elps us fully grasp it. Most of te literature, in fact, considers te destination as a mere framework, noting more tan te abstract concept of market, in wic to analyze te micro-beavior of specic industries (e.g., te structure of te otel industry in a specic destination) or tourists (e.g., te determinants of tourism demand in a given destination). Similarly, te macroeconomic literature often identies te destination wit te wole country, in a framework were te economy, in order to attain te maximization of te growt rate, can specialize in tourism and were no attention is paid to wat appens witin te destination itself. Te many teoretical and empirical works testing te validity of te Tourism-Led-Growt ypotesis or testing weter tourism can be considered as an independent factor of economic growt (Lanza & Pigliaru, 1995, 2000; Brau et al., 2007; Sequeira & Macas Nunes, 2008; Figini & Vici, 2010) can be recalled ere. Bot micro and macroeconomic literatures, owever, only scratc te surface of wat is te specic and peculiar economic problem of te TD. 2

3 Te mostly regarded economic model specically built for te destination is probably te Tourism Area Life-Cycle (TALC) model (Butler, 1980), a well-known application of te product life-cycle teory. Togeter wit Plog (1974) psycograpic representation of te interrelation between types of tourists and evolution of te destination, te TALC model is still today te main pillar on wic te economic analysis of te TD is based (Butler, 2006). Regardless of its popularity, owever, te TALC model as important limitations: rstly, it is a purely descriptive model, wit very little explanatory power; secondly, it is a deterministic model, and te TD is bound to pass troug te subsequent pases of evolution, te model being unable to fully take into account dierent trajectories. Researc in tourism economics as only recently been investigating te TD wit a closer look, and two interesting strands of literature can be identied. Te rst one provides a more teoretically sound basis to te TALC model. In particular, Giannoni & Maupertuis (2008) analyze te dynamics between te pattern of investment in tourism infrastructures, policy coices and environmental quality, tereby generating cyclical pats in te number of osted tourists (from te perspective of consumption waves teory, see also Swann, 2010); similarly, Lozano et al. (2008) build a teoretical model wose dynamics are consistent wit TALC; nally, Cerina (2007) investigates te relationsip between growt dynamics and environmental sustainability in a model were tourism resources are interpreted as common goods, tus providing a teoretical basis for te concept of sustainable tourism. Neverteless, all tese models sare te same caveat: tey are mainly macroeconomic growt models were te TD completely overlaps wit te economic system (tat is, te country is completely specialized in tourism) and were tere are no insigts on wat appens witin te TD: in oter words te models do not ave a micro-foundation. A second strand of literature tries to take into account specic organizational features and economic caracteristics of te destination. In tis line of researc, te rst attempts to build a compreensive economic model for te TD are Huybers & Bennett (2003), Papateodorou (2003), Wacsman (2006), Candela et al. (2008), Candela & Figini (2010) and Andergassen & Candela (2012a, 2012b). Witin tis framework, te present paper argues tat te TD as specic and peculiar features wic call for a novel and independent economic analysis. In particular, te economic model for te TD erein developed focuses on two specic aspects of tourism economics tat, in our opinion, are not properly addressed by te existing literature: te issue of coordination between local rms and te degree of sopistication of te tourism product. In doing so, we extend and integrate te works of Andergassen & Candela (2012b), wo tackle te issue of 3

4 sopistication (i.e., te supply of a variety of dierent local goods and services tat are also demanded and purcased by tourists during teir stay) and Candela et al. (2008), and Candela & Figini (2010), wo address te issue of price coordination. Our approac borrows from Papateodorou (2003), wo rstly formally analyzed te issue of complementarity and variety of services witin te tourism product, and from Wacsman (2006), wo rstly formally analyzed te problem of price coordination witin te destination (see also Alvarez-Albelo and Hernandez-Martin, 2009). Te novelty of our paper is twofold. Firstly, we generalize te problem of coordination, tackling te main limitations in te results of Wacsman (2006) and Candela et al. (2008). Secondly, we jointly consider sopistication and coordination, tus building a unique economic model to describe te development and te organizational pattern for te TD. Our approac opens a new window from were to look at te economics of te destination, tus igligting important policy implications for te destination management and for local stakeolders. Te economic model for te TD developed in tis paper stems from two inter-twinned perspectives, empirical and teoretical. From te empirical perspective, our model aims at being consistent wit te anecdotal evidence of te great diversity of tourism destinations over te world, wic dier in teir istory, endowment of resources, organizational structure, institutional arrangement and specialization. In tis respect, our model is able to depict dierent trajectories for te TD, ence being able to overcome te deterministic logistic sape of evolution described in te TALC model. Rater, our setup allows for multiple equilibria. In te same respect, we are also able to explain te reasons wy some destinations can be locked-in in a certain pase of development wile oters jump one or more pases all togeter. Tis last problem is key for potential destinations (particularly in developing countries), in wic tourism is not (yet) developed, but is seen as an opportunity, being often considered a strategic pat for economic development by bot policy makers and local stakeolders. As it will be igligted in te concluding section, our speculative teoretical framework suggests future directions in empirical researc, for example testing weter te pattern of coordination and te degree of sopistication in te tourism product are key signicant factors in explaining te destination's pat of development. From te teoretical perspective, te destination is a novel and interesting object of study for economics. Wile some of te specic problems of te TD (te need of supplying public goods and of tackling externalities) are standard market failures wic usually call for te intervention of te public sector (altoug Huybers & Bennet, 2003, sow tat te public intervention is not necessary if voluntary cooperation among local stakeolders for te management of common resources arises) 4

5 tere are two specic and peculiar caracteristics of te destination tat are under-investigated and tat are also marginal issues in te standard economic teory. 1. Te tourism product supplied and sold by (or witin) te destination can be dened as a bundle composed of a set of elementary items. Suc goods and services (accommodation, transport, sopping, attractions, events) are demanded in a relationsip of complementarity and substitutability by te tourists during te oliday experience. Wile te concept of bundle is a standard tool in economics (it is commonly used to build price indices to be applied bot in teory and in national accounting), wat is new in tourism economics is its role as an object of study. Te denition of te product as a bundle of complementary and substitutable goods opens te issue of coordination and cooperation among local rms supplying single components of te oliday. In tis paper we mainly focus on te complementarity feature, wic is particularly relevant for te oliday and allows us to dene te tourism product as an anticommon (Micelman, 1982; Heller, 1998; 1999). Accordingly, te oliday can take place if and only if te 'permission to stay' is granted by all rms supplying complementary services to tourists: if just one rm does not grant permission, te tourism activity in te destination can not take place. Stemming from te anticommon nature of te tourism product, te relevant questions to be addressed by an economic model for te destination are: ow can te anticommon problem be tackled? Is tere any role tat can be played by te destination management? Wat is te optimal pricing policy for te tourism product as a wole? In Section 4 we will present and discuss te answers of our model to tese questions. 2. Te wole territory (intended as bot te endowment of resources and its organizational structure) enters te production function of te oliday as an input; in tis respect te destination can be analyzed as a (meta) economic agent taking important decisions from te supply-side at a level wic is intermediate to te micro-level (rms and tourists) and to te macro-level (te wole economic system, usually te country). Te TD as sometimes been interpreted as a type of cluster (Porter, 1998) since it sares some of te caracteristics of te industrial district altoug it can not be dened as suc (Micael, 2003; Candela & Figini, 2012). More specically, in te industrial district rms eiter produce substitute goods (orizontal cluster) or intermediate goods wic are ten assembled (vertical cluster). In te TD, on te contrary, rms mainly produce complementary services tat are directly sold to nal consumers. Brandeburger and Nalebu (1997) name tis a diagonal cluster, a concept tat nds in te TD a 5

6 perfect application and tat advocates for wat tey call co-opetion, tat is, te co-existence of competition and cooperation between rms. At te same time, local resources represent te main motivation of te trip, and terefore tey also enter te utility function of tourists. Suc combination of an item tat is at te same time an input of production and an argument of utility provides anoter novel economic problem to look at. Moreover, most of tese resources are freely available (te landscape and te oer of territory in general) and tey can be considered as common goods (Hardin, 1968), wile oter resources can be developed by te destination (e.g., an event or an amusement park). In tis respect, te relevant questions to be addressed by an economic model for a destination are: wat is te process leading to te rise, te development, te specialization and te sustainability (bot environmentally and economically) of te TD? Wat are te key-factors driving to te development of a tourism product based on natural and/or cultural resources rater tan on an institutional arrangement promoting a sopisticated tourism product? In Section 5 we will present and discuss te answers of our model to tese questions. Te remainder of te paper is structured as follows: Section 2 introduces and discusses te caracteristics of te tourism destination, tus providing te intuition beind te model. Section 3 describes te model's structure and rationale, its assumptions and main limitations. Section 4 focuses on te coordination issue and te optimal institutional set-up for te destination wile te main results in terms of resource specialization, variety, and sopistication of te tourism product are described in Section 5. Section 6 discusses te main results and te caveats of te model, tus paving te way for future researc, bot teoretical and empirical. 2 Te Caracteristics of te Tourism Destination From te economics perspective, te TD does not necessarily coincide neiter wit te destination management organization (DMO), wic is one of te possible institutional set-ups tat can prevail, nor wit te local policy maker. Instead, te destination can be seen as a ypotetical (meta) agent, a territorial system wit a specic objective function to maximize and subject to given constraints. In tis respect, te economics of destinations studies te relationsip between demand (by dierent types of tourism osted in te destination) and supply (by te mix of rms located in te territory) for te wole tourism product. In general, a destination may oer dierent types of oliday to dierent types 6

7 of tourism, eac possibly caracterized by a dierent mix of specic goods and services, including te consumption of local resources, and accommodation. Terefore, te tourism product is made up of all te tourism destination specic and non-specic goods and services tat are demanded during one day of oliday, its quantity is measured troug te number of overnigt stays and its value is te daily price of te oliday. In te case of multi-tourism destinations, te wole tourism product can ence be interpreted as te weigted average of te many types of oliday oered in te destination. Note tat in te present context, were te demand function is known wit certainty, coosing te daily price (wic coincides wit te weigted average price of te oliday) is equivalent to coosing tourism expenditure (i.e., te oliday's aggregate price). It is well known tat many conceptions of value exist, being particularly relevant in tourism were many non-market or semi-market goods (suc as environmental and cultural resources) are demanded and used. As it is typical in te economic approac, we only focus on te market value of te oliday, as determined by its price, and we abstract from any implication regarding te social and cultural value of tourism in te destination. Neverteless, we capture indirectly cultural and environmental values of te destination's resources troug price and demand eects, as in our model consumer demand canges wit te perception of environmental quality. Contrary to wat can be done in applied researc, in a teoretical model we ave to rely on strong assumptions, less descriptive of te real-world complexity of destinations but able to unfold te core of te economic problem faced by te TD. We start by identifying two necessary conditions for te birt of a tourism destination, and one necessary condition for its long-term sustainability (Andergassen & Candela, 2012b). Firstly, a generic point of interest, natural or articial, must exist in order for te destination to come into being. In order to keep te model as simple as possible, wile maintaining its explanatory power, local tourism resources are measured troug a quantitative index R, wic summarizes te overall endowment of te destination (its natural, cultural and organizational resources, te accessibility of its transport system, its infrastructures, etc.). R depends on bot exogenous (te endowment provided by nature, istory and culture) and endogenous factors (te investment undertaken by te local community - public and private sectors - to adapt te endowment in order to be successfully included in te tourism product, to preserve it, and to enance it: for example by building amusement parks or conference venues, by organizing events, etc.). In sort, any destination can be identied by its endowment of resources, te only constraint being tat R > 0. Given a certain quantity R, its 7

8 quality as perceived by tourists, tat we call z, depends (non-positively) on te number of overnigt stays, ence rougly accounting for and measuring crowding and congestions eects. Te sign of te relationsip between te parameter z and overnigt stays is a matter of discussion, and we sould also consider te dierent case of a positive or, more in general, a non-linear relationsip. In tis paper we assume tat a tresold in te number of overnigt stays exists, after wic congestions eects are at play. Secondly, at least one variety of local goods as to be supplied togeter wit ospitality and te local resource, oterwise te visit to te destination is not motivated. We measure te variety of te tourism product troug n, te number of dierentiated tourism goods and services tat compose te tourism bundle; eac good/service is represented by te index i = 1,..., n. Te straigtforward interpretation is tat te iger te number n 1, te greater te level of sopistication (te variety) of te tourism product; at te limit, n = 1 wen only te basic service needed to access te main resource is provided in te destination. For te sake of simplicity, we assume tat tere are only two rms in te destination, one ospitality rm, supplying te accommodation service and te oter one producing all te dierentiated goods/services. Te assumption of aving only one rm supplying all te dierentiated tourism goods/services greatly simplies te exposition witout altering te qualitative features of te results (in footnote 2 we discuss ow results cange if tis assumption is relaxed). We consider identical tourists endowed wit a CES (Constant Elasticity of Substitution) utility function, following a long strand of literature on product dierentiation wic dates back to te seminal paper of Dixit & Stiglitz (1977) and tat as already been applied to tourism by Papateodorou (2003). Hence, from te demand side, we consider te coice problem of a consumer wo as to decide ow to allocate a given income among a set of generic consumption goods (y) and a tourism product (T ), a bundle in wic te local resource R is measured troug its overall quality (z), ospitality () and a variety of goods and services (x i ). Moreover, te supply of dierent varieties i of te local good x i and te complementary ospitality service need to coordinate in teir quantity, quality and price, oterwise a suitable product able to meet te tourism demand can not be supplied. For te sake of simplicity we only consider coordination in price (assuming tat bot coordination in quantity and in quality are already in place, see Wacsman, 2006; Candela & Figini, 2010) between te only ospitality rm in te destination and te rm supplying dierentiated tourism related goods and services. 8

9 Te above mentioned conditions are owever not sucient to guarantee te survival of te destination in te long-term. In fact, long-term economic sustainability can be acieved only if overall tourism prots of te destination, Ω, net of te costs K borne by te destination for te investment undertaken to promote and foster te local tourism sector, are at least as large as Ω, wic is an exogenously dened tresold tat guarantees te long-term survival of te destination. Tis is te static equivalent of te dynamic principle tat, in terms of endogenous growt teory, te growt rate attained troug specialization in te tourism activity must be at least as large as te one obtainable if te destination specializes in alternative activities (Lanza & Pigliaru, 1995; 2000). Concerning te market structure of te destination, we assume tat bot rms are monopolists. Tis can stem from te fact tat te destination operates in a monopolistic competition regime because of te peculiarity of its local endowment R tus translating into te market power of its ospitality rm (sector) and of te rm producing dierentiated tourism goods x i, since tese goods are linked to te local resource and teir caracteristics dier across varieties (Candela et al., 2009). We acknowledge tat in reality tere are many rms tat are aware of teir market power and terefore strategically interact wit eac oter. Consequently, oligopolistic competition would be a more appropriate setting for te analysis, but we leave tis issue for possible future researc. Tis modeling set up will allow us to identify te conditions under wic a region can successfully develop into a tourism destination, eiter by following a policy of enancement of its resources R, by directly or indirectly inuencing te degree of sopistication n, or by selecting a strategic coordination of prices (p i, i = 1,..., n and p ) between te producer of local goods and te ospitality sector. Tus, te implications for tourism policy can be investigated, providing answers to te many (peraps too many) opes of policy makers and local stakeolders wo see tourism as te key strategic sector for te economic take-o of teir region. On tis aspect, two positions can be recalled. For someone (Raestin, 1986), tourism is like te Peano's curve, tat in te teory of fractals is a space-lling curve; ence every territory can become a tourism destination. For oters, regardless of te investment in resource enancement, in articial endowment or in te variety of local goods, tourism development is only triggered by te existence of an exogenous endowment and by te structure of preferences of te consumers: witout suc prerequisites and conditions on te demand, te territory would never be able to reac te tresold Ω necessary to become a sustainable tourism destination. 9

10 3 Te model To more precisely investigate te complex process leading to te rise and development of te TD intuitevely described in te previous section, we now develop a formal model. We identify a multistage problem, wose decision tree is sown in Figure 1. Firstly, te local community as to decide weter to develop a tourism destination or invest in oter economic activities, te former strategy being cosen if te net economic return to te investment is at least as large as its opportunity cost, Ω K Ω, were Ω is te destination's outside option. If tis inequality olds, te optimal amount of local resources (ere intended as common goods), ospitality and variety of te local goods is determined. [Insert Figure 1 about ere] In te following stage of te problem, te issue of weter te tourism activity in te local territory sould be coordinated or not is tackled. In tis pase, te equilibrium prices for goods and services included in te tourism product (ere intended as an anticommon) are computed. Te decision on weter or not to coordinate depends on te sign of Ω C Ω NC, were Ω C and Ω NC are overall tourism prots of te destination wit and witout price coordination. In te case of coordination, tere are two possibile solutions: coordination provided by te destination management, in wic total prots are Ω DM, and coordination provided by a tour operator, in wic total prots are Ω T O (see Figure 1). Moreover, from te destination's perspective it is also important to distinguis between local and foreign tour operators, since in te latter case te tour operator's prots are exported and ten leave te local economy. Altoug we argue tat te solution wit te local tour operator dominates te one wit a foreign tour operator in terms of total local prots, tis strategy is not always feasible, particularly for developing countries (in many destinations, te necessary professional skills and competencies migt lack, or te local tour operator migt ave iger production costs stemming from information asymmetry or weaker economies of scale and of scope): ence it is represented as a dotted line in te decision tree of Figure 1. An important assumption of te model is tat production costs of te two local rms are nil (taking positive average production costs into account would not alter te qualitative features but only complicate te exposition of our results) and consequently tourism prots coincide wit revenues, and ence wit total expenditure of tourists in te destination. Tis as an interesting implication, 10

11 since it allows us to reconcile te target of prot maximization, wic is standard for economic teory, wit te one of maximization of tourism expenditure, te usual target for local tourism policy. Hence, te model can correctly describe te real-world practice of looking at overall tourism expenditure as te main indicator of tourism performance for te destination. We rst describe te demand side of te model. Since overall tourism prots (Ω) are equal to tourism expenditure, wic is directly linked to te number of overnigt stays, tey in turn depend on te caracteristics of te local tourism product. We follow Papateodorou (2003) and Andergassen & Candela (2012b) by assuming tat tourists' demand depends on: i) te availability of natural and/or cultural resources (see also Melian-Gonzalez & Garcia-Falcon, 2003); ii) te availability of a variety of local goods and services, suc as restaurants, recreational activities, wellness and sport facilities, etc., tat justify tourism in te destination, beyond te enjoyment of te main resource. In tis respect, we assume tat tourists sow love for variety in te tourism product, as dened by Dixit & Stiglitz (1977). We consider a unit mass of identical tourists endowed wit a CES utility function aving te following arguments: i) te lengt of stay of te oliday at te destination; ii) a variety of n 1 dierentiated tourism related goods and services x i oered at te destination, wit i = 1, 2,..., n; iii) an index measuring te perceived quality z of te destination's resource endowment R; iv) te consumption of a non tourism product y (wic can also be tougt as te oliday in an alternative destination). Te tourism product is dened by a bundle T including overnigt stays and te wole variety of local goods, T = (, {x i }). If we name wit U T,j te sub-utility of te consumer j as a tourist and wit U Y,j te sub-utility stemming from non-tourism consumption, total utility for te agent is U j = U (y (j), z (j), (j), x i (j)) and can be written troug a compound CES utility function (3) (compound CES utility functions ave been employed in te context of industrial organization and of tourism economics by Jiandong (2003) and Andergassen & Candela (2012a, 2012b), respectively): U T,j = z γ (j) + ( n ) γ α x α i (j) i=1 1 γ (1) U Y,j = y (j) (2) 11

12 ( ) U j = U β Y,j + U β 1 β T,j ( n = yβ (j) + z β γ (j) + x α i (j) i=1 ) γ α β γ 1 β (3) In suc model, 0 < β < 1 implies tat te non-tourism good y and te tourism product T are gross substitutes (if β = 1, te two goods are perfect substitutes); γ < 1 implies tat overnigt stays and te consumption of local goods x i are gross complements (if γ te two goods are perfect complements). We also assume tat β α < 1, tat is, te degree of substitutability between te tourism product T and te non-tourism product Y is not greater tan te degree of substitutability among local tourism goods and services x i. Finally, z indicates te perceived quality of te tourism resource, suc as beaces, mountains and/or te cultural eritage of te destination. Te resource quality z as te O-ring property, tat is, it enters te utility function (1) as a multiplicative factor since tourism exists if and only if z > 0. Te price of te non-tourism good is taken as a numeraire, p y 1, p is te price of te overnigt accommodation in te otel, p i is te price of te i-t variety of te local good. Te budget constraint of tourist j is ence: n y (j) + p (j) + p i x i (j) = I (4) were I is te tourist's overall income, wic is exogenous to our analysis since tourists, by denition, i=1 are non-residents. Te tourism resource R, generally understood as te wole endowment of te territory, is considered as a public good of te destination and terefore does not appear in te budget constraint (4) (see Papateodorou, 2003; tis assumption, owever, does not old if te main resource of te destination is very specic and terefore semi-private, suc as an amusement park or a specic museum.). We assume tat te perceived quality of te resource, z, depends positively on its quantity R, z R > 0, but wit non-increasing returns, z RR 0, and non-positively on H, te total number of overnigt stays in te destination, since te level of satisfaction te tourist gets from visiting te resource is inversely linked to te crowding of te site, z H 0 wit wit z HH 0 and z HR 0. In particular, we assume tat z is a continuous function of H and tat a tresold H for aggregate overnigt stays exists were z H = 0 for H H and z H > 0 for H > H. Wit tis assumption we aim to model te case were aggregate overnigt stays reduce tourism quality if tey exceed te tresold H (we tank an anonymous referee for suggesting tis functional form). Let te elasticity of z wit respect to H be ε z H = z H H z 0, were εz H = 0 for H H and εz H > 0 for H > H. 12

13 We rst derive te individual demand function for accommodation and for te dierentiated goods and services, and ten calculate aggregate demand functions. Given te symmetry on te supply side of tourism products x i (by assumption average production costs of goods and services are all nil), we ave tat p i = p for all i = 1,..., n. Since te mass of tourists is normalized to one, aggregate demand functions H, X i and Y are simply te sum of te tourist's individual demand functions (j), x i (j) and y (j), for individuals j [0, 1]. More formally, H = 1 0 (j) dj, X i = 1 0 x i (j) dj and Y = 1 0 y (j) dj, were H represents total overnigt stays in te destination, X i total consumption of te complementary local good i and Y total consumption of oter goods. We consider parameter values suc tat at te equilibrium te price of overnigt stays is larger tan te price of dierentiated tourism goods and services, i.e. p > p. Note tat te single tourist is small compared wit te overall mass of tourists in te destination and terefore, for is consumption decisions, e takes te perceived tourism quality as given. At te aggregate level, te individuals' coices feed back into tourism quality wic in turn aects te individual, and consequently also aggregate, consumption beavior. In oter words, a xed point problem as to be solved. Te following properties of aggregate demand functions can be establised. Lemma 1 Te aggregate demand function for overnigt stays in te destination is H (n, R, p, p ), were H is increasing in n, and R and decreasing in p and p; te aggregate demand function for te single tourism good is X (n, R, p, p ), were X is decreasing in n, increasing in R and decreasing in p and p. Proof. Te proof can be found in te Appendix. Because of te complementarity between overnigt stays and tourism related goods and services, an increase in n leads to an increase in te demand of overnigt stays. On te oter and, an increase in n reduces te demand of eac single tourism good X. An increase in R, by fuelling tourism quality, increases te demand of overnigt stays H and te demand of tourism goods X. Canges in prices ave te standard eect on demand: te law of demand olds; assuming tat te elasticity of z wit respect to H is in absolute values not too large, 1 te complementarity between {x i } and implies tat an increase in p (p ) decreases demand of H (X ). 1 An increase in p unambiguously reduces H. An increase in p as, because of te complementarity between {x i } and, a direct negative impact on X, but a indirect positive one, since it reduces H and terefore increases tourism quality z. If ε z H is not too large, ten te former eect dominates te latter one. A formal proof of tis result can be obtained upon request from te autors. 13

14 Given tat production costs are nil, prots of te ospitality sector are Π (n, R, p, p ) = p H (n, R, p, p ) and tose of te rm producing te dierentiated goods and services are nπ (n, R, p, p ), were Π (n, R, p, p ) = px (n, R, p, p ). Overall tourism prots for te destination are Ω (n, R, p, p ) = nπ (n, R, p, p ) + Π (n, R, p, p ). 4 Te Coordination between Firms in te Destination and te Optimal Pricing Strategy Like all multi-stage problems, te model as to be solved backwards, and te equilibrium prices of te dierent coordination alternatives (second stage of te problem) ave to be determined in order to get te optimal endowment of local resources and sopistication of te tourism product (te solution of te rst stage problem). In tis section we solve te second stage of te problem by moving to te supply-side and assuming tat rms and destinations are price-makers. Tis last ypotesis is coerent wit real-world tourism markets, wic are often non-competitive markets eiter because rms ave monopoly or oligopoly positions or, as it is te case for destinations, because of te ig degree of dierentiation of te tourism product at te global level (Candela et al., 2009). Hence, for a given coice of n and R, we investigate te caracteristics of optimal pricing strategies for te TD. Te daily price of te oliday in te destination, v, is: v = p + np X H (5) consisting of te price for accommodation services and te price of dierentiated tourism goods/services times te quantity demanded per day ( nx H ). Te equilibrium quantity for te tourism product is identied by te number of days spent at te destination (te number of overnigt stays, H ). As already recalled, in tis set-up tourism in te destination can be interpreted as a 'permission to stay' granted by te rms supplying complementary services demanded by tourists wile on oliday: if one of te two rms does not grant permission, te tourism activity can not take place. For instance, tourism demand would be nil if restaurants were not available in te destination, or if no accommodation was present. Te catcy idea regarding te existence of a unique economic good, wose property is fragmented across dierent rms, is known as anticommon and is not new in Economics (see 14

15 Micelman, 1982; Heller, 1998; 1999; Parisi et al., 2000; 2004) altoug te concept as not been suciently exploited so far, particularly in te eld of tourism economics were it neverteless nds a perfect application (Candela et al., 2008). Note tat te anticommon is exactly te opposite of te muc better known common, a good wic is available to everyone and witout well dened property rigts (Hardin, 1968). In a general perspective, rms in te destination ave to coordinate in quality (in order to avoid, for example, tat tourists osted in a luxury otel only nd take-away restaurants) and in quantity (to guarantee tat tere is no rationing in any of te demanded services). However, in tis paper we neglect tese issues and we only focus on price coordination. We introduce tree dierent cases: (a) no coordination, were eac rm maximizes its prots; (b) price coordination by means of a destination management and (c) coordination provided by a tour operator supplying an all-inclusive oliday. 4.1 No Coordination Witout coordination, rms solve independent maximization problems. In particular te maximization problem for te ospitality rm is max p Π. First order condition for tis problem is Π p = H + p H p = 0 (6) Te rm producing dierentiated goods and services faces te maximization problem max p nπ. First order condition for tis problem is nπ p = nx + pn X p = 0 (7) By considering te rst order conditions (6) and (7), and assuming tat second order conditions are satised, we obtain a system wose solution (dening a Nas equilibrium tat exists if te two functions intersect in te rst quadrant, see also Wacsman, 2006) implicitly denes te optimal values of p and p: g (n, R, p, p ) = 0 g (n, R, p, p ) = 0 (8) For eac R and n, optimal prices for te destination can be expressed as p NC φ NC (n, R), rm prots are Π NC = φ NC (n, R) and p = (n, R) and nπ NC (n, R), and total tourism prots for te destination 15

16 are Ω NC (n, R) = Π NC (n, R) + nπ NC (n, R). 4.2 Coordination provided by te destination management Tis type of coordination, external to te market, takes place if te otel and te local rm support te role and back te activity of a public autority, named destination management. Ten, we assume tat tis local autority is able to coordinate te local tourism sector troug informational and promotional activity and to sell te tourism experience in te destination (local goods and ospitality) as if it were an all-inclusive package. Formally, te analytical problem becomes te maximization of overall tourism prots (tourism expenditure) in te destination: max p,p vh = Ω (n, R, p, p ) were v is te daily price of te oliday in te destination (5). Assuming tat te second order conditions are satised, te rst order conditions for tis problem are Ω H p = H + p p + np X p = g (n, R, p, p ) + np X p = 0 (9) Ω p = p H X p + nx + np p = g (n, R, p, p H ) + p p = 0 from wic we get for eac R and n te optimal price for te destination p DM = φ (n, R) and p DM = φ (n, R), rm prots Π DM (n, R) and nπ DM (n, R), and total tourism prots Ω DM (n, R) = Π DM (n, R) + nπ DM (n, R). By comparing system (8) and (9) and because of Lemma 1 te following Proposition olds. Proposition 1 p DM < p NC and p DM < p NC and Ω DM > Ω NC. Proof. Te result follows from te second order conditions of te problem and te comparison of system (8) and (9). In particular, suppose tat p = p NC and p = p NC, ten from (9) and Lemma 1 Ω p large. = np X p < 0 and Ω p = p H p < 0, and consequently, because of concavity of Ω, p and p are too Te intuition beind tis result is tat wen goods are complements, teir prices are too ig wen tey are individually set, since rms are not able to internalize te negative eects a price increase as on te oter rm's demand and tus prots. Alternatively, te coordination of prices provided by te destination management allows to set a more ecient daily price for te tourism product, tus 16

17 leading to an increase in overall tourism expenditure even toug individual prices are lower. However, prots for one of te two rms could be lower wen price coordination is in place, if te externality is strongly asymmetric (tat is, te price of one good aects strongly te demand of te oter one but not te oter way around). For instance, consider te case were te price of overnigt stays as a strong negative impact on te demand of dierentiated tourism goods and services, and tat te eect of a cange in te price of tese latter on te demand of overnigt stays is negligible. Te destination management would in tis case internalize tis negative externality and tus x a lower price for overnigt stays, wile keeping te same price for tourism goods. As a consequence, prots of te ospitality service are lower, prots of te rm producing dierentiated tourism goods are larger and overall tourism prots are larger compared wit te case of no price coordination. In tis case te destination management sould also redistribute prots among its members. Note tat Proposition 1 olds for a generic demand function as long as X p satised. < 0 and H p < 0 and second order conditions are 4.3 Coordination Provided by a Tour Operator Coordination can also occur endogenously wen te market itself identies a new type of rm for managing te anticommon problem. Suc rm, wic is known as te tour operator in te business practice, stipulates contracts wit otels and local rms by anticipating a payment tat covers te market risk: te premium paid by rms for tis insurance activity is te discount granted on te full market price (Castellani & Mussoni, 2007). Te tour operator ten promotes and sells te services witin an all-inclusive oliday package, tus bearing te risk of no sale. Te contract is accepted by te otel and by te rm selling te dierentiated goods if, despite te discount, teir prots increase (or at least do not decrease) wit respect to te case of no coordination. Let us assume tat te tour operator oers a free-sale contract in order to buy services from local rms in wic te discounted price is p d for te overnigt stay and p d for eac dierentiated good, and were d and d are respectively te two discounts (to be interpreted as te insurance premium). Te economic goal of te tour operator is to maximize its own prots Π T O (again, we assume for te sake of simplicity tat te tour operator average costs are nil) subject to te participation constraint of te local rms: tey accept te contract rater tan selling directly on te market if and only if teir prots are at least as large as te prots tey get witout coordination. Suc optimization problem (for a dierent interpretation of te tour operator's activity in te coordination problem, see 17

18 Alvarez-Albelo & Hernandez-Martin, 2009), in a principal-agent setting is ence: max p,pπ T O = p H + npx (p d ) H n (p d) X (10) (11) are te participation constraints, were Π NC s.t. (p d ) H Π NC and (p d) X Π NC (11) and Π NC are te rms' prots obtained in Section 4.1 and constitute teir outside options of not accepting te tour operator's contract. If we assume tat te tour operator (te principal) oers to local rms (te agents) te minimum revenues of acceptance (wic transforms inequalities (11) into equalities, tus determining d and d ) and by replacing te binding participation constraints (11) into te tour operator's objective function (10) we obtain max p,p Π T O = p H + npx Π NC nπ NC (12) It is easy to verify tat te rst order conditions of (12) are te same as tose in (9) and tus optimal prices are p = p T O and p = p T O, wic are identical to tose of te destination management. 4.4 Discussion By comparing te solution of no coordination wit tose in te case of exogenous coordination troug te destination management and endogenous coordination troug te tour operator, we can state te following teorem. Teorem 1 (Te Coordination Teorem) Given te anticommon property of te tourism product, coordination among rms in te destination, wic can eiter be provided by te destination management or by a tour operator, increases tourism prots. Hence, te coordination of prices allows te tourism activity in te destination to be more ecient. 2 Note tat tis is an example of te prisoner dilemma were (price) coordination yields a Pareto superior solution to non-coordination. 2 If we assume tat dierentiated tourism goods and services are supplied by more tan one rm, eac wit some market power, ten in addition to te problem tat stems from te complementarity relation between accommodation and dierentiated tourism goods described above we ave an additional problem stemming from te substitutability between te single dierentiated goods/services, were it is well known tat rms carge lower tan socially optimal prices. In tis case rms do not internalize te positive external eect tat a price increase produces on te demand for anoter product. Tus, by considering togeter te complementarity and te substitutability problem, a more general coordination teorem still olds were exogenously or endogenously bot negative (due to te complementarity) and positive (due to te substitutability) externalities are internalized. 18

19 In case of coordination provided by te market as described in Section 4.3, owever, tere is a distributional conict between te tour operator and local rms. Independently of te way in wic te distribution is solved (wic depends on te bargaining power of local rms, te tour operator and, in a more general setting, on te number of tour operators competing for te destination, see Alvarez-Albelo and Hernandez-Martin, 2009), it is crucial to evaluate weter or not te tour operator is a local or a foreign rm. In fact, if te tour operator is a local rm, total tourism prots are te same as is in te case of coordination by destination management, altoug te distribution of te overall prots among local rms canges. More formally, total prots in te presence of a tour operator are Ω T O = Π T O + Π NC + nπ NC, and tus it is easy to see tat Ω T O = Ω DM. On te contrary, if te tour operator is a foreign rm, its prots do not contribute to te destination's income and tus total tourism prots of te destination are Ω T O = Π NC + nπ NC, and tus Ω T O = Ω NC < Ω DM, te dierence Ω DM Ω NC being te surplus generated by te price coordination and forming te tour operator's prots. It is ten possible to state a corollary of te Coordination Teorem by focusing on te distributional consequences of endogenous coordination. Corollary 1 Wen coordination is provided by a foreign tour operator, local prots are lower tan in te case of coordination provided by te destination management. Te type of coordination cosen in te destination is terefore not distribution neutral. Clearly, te solution of a local tour operator dominates a foreign one's (since in te former case te tour operator's prots remain in te local economy), but it is fundamental to recall tat tis corollary stems from te assumption of identical cost structure for bot tour operators, and tus in a more general setting, it may not old. It is likely tat for many destinations, particularly in developing countries, te local tour operator migt lack te skills or te market conditions to produce at suc a (low) cost. To simplify te exposition, in te remaining part of te paper we focus solely on te case of a local tour operator. 5 Te Optimal Level of Sopistication of te Tourism Product in te Destination In tis section we now move to te rst stage problem were te TD as to nd te optimal pattern of development, given te price solutions for te coordination problem dened in Section 4. We argue 19

20 tat, following a long-run strategy of development, te local policy maker can engage in investments tat enric te destination's natural as well as cultural resource endowments R. Moreover, we argue tat it can directly or indirectly control te degree of sopistication of te tourism product n. Tis is done, for example, troug eiter granting licenses to open sops or oter business activities or, in a more microfounded model, troug te taxing or subsidizing of te setup cost for single production/commercial facilities. In a full-edged model one sould rstly calculate te optimal private degree of product dierentiation, secondly calculate te optimal social one, and tirdly nd te optimal policy intervention suc tat te private one coincides wit te social one (owever, tis is beyond te scope of te paper). More formally, te TD faces te following maximization problem max n,r Ω ( n, R, p C, p C ) K (n, R) (13) s.t. Ω K Ω (14) were K (n, R) are te policy maker's cost of enforcing a degree of sopistication n and endowing te destination wit resources R, were K n > 0, K R > 0, 2 K n 2 > 0 and 2 K R 2 > 0. A cange in n and R aects tourism prots directly and indirectly troug a cange in p and p ; since te solution at te second stage is eiter exogenous or endogenous price coordination wit equilibrium prices ( p C = p T O = p DM ; p C = ) pt O = p DM, te indirect eect is of second order and can tus be neglected because of te envelop teorem. Formally, te total derivative of tourism prots wit respect to n is dω dn = Ω n + Ω p C p C n + Ω p C p C n (15) were te rst term is te direct eect of n on Ω and te last two terms are te indirect eects troug p C and p C, respectively. Because of te rst order condition (9) te indirect eects are negligible, i.e. Ω p C = 0 and Ω p C = 0, and tus only te direct eect matters, i.e. dω dn = Ω n. Te case of a cange in R gives symmetric results. Finally, (14) is a sustainable development constraint requiring tat tourism prots must be suciently large to guarantee te survival of te destination over time. Before caracterizing te solution to problem (13), we describe te analytical properties of Ω, wic is a special case of te results in Andergassen and Candela (2012b). Proposition 2 (a) Ω is increasing in R. (b) Ω is decreasing in te degree of tourism sopistication n if ε z H λ γ > 1 and is increasing if ε z H λ γ < 1, were λ γ γ 1 γ ( 1, 0). 20