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DEMAND FOR TOURISM. Contents 1 . Nature of Demand 2. Travel and Tourism Products 3. Buyer Objectives 4. Types of Variables Influencing and Constraining Tourism Demand 5. Levels of Choice in tourism industry Demand 6. Constraints on Tourism Demand. Definitions of tourism demand.
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DEMAND FOR TOURISM Contents 1. Nature of Demand 2. Travel and Tourism Products 3. Buyer Objectives 4. Types of Variables Influencing and Constraining Tourism Demand 5. Levels of Choice in tourism industry Demand 6. Constraints on Tourism Demand
Definitions of tourism demand • Definitions of demand vary according to the subject perspective of the author. • For example, economists consider demand to be schedule of the amount of any product or service that people are willing and able to buy at each specific price in a set possible prices during a specified period of time.
In contrast psychologists view demand from the perspective of motivation and behavior. • Geographers, on the other hand define tourist demand as: the total number of persons who travel, or wish to travel to use tourist facilities and services at places away from their places of work and residence.
Definitions of tourism demand Each approach is useful. • The economic approachintroduces the idea of elasticity – which describes the relationship between demand and price, or other variable. • The geographer’sdefinition implies a wide range of influences, in addition to price, as determinants of demand and includes not only those who actually participate in tourism, but also those who wish to, but for some reason do not. • On the other hand, the psychologistscratches underneath the skin of the tourist to examine the interaction of personality, environment and demand for tourism.
Concepts of Tourism Demand The demand for tourism consists of a number of components that make up the total demand for tourism: • Effective or actual demand is the actual number of participants in tourism or those who are traveling, i.e. de facto tourists. This is the component of demand most commonly and easily measured and the bulk of tourism statistics refer to effective demand. • Suppressed demand is made up of that section of the population who do not travel for some reason.
Concepts of tourism demand • Two elements of suppressed demand can be distinguished. • Firstly, potential demand refers to those who will travel at some future date if they experience a change in their circumstances. • For example, their purchasing power may increase, or they may receive more paid holiday entitlements, and they therefore have the potential to move into the effective demand category.
Concepts of tourism demand • Deferred demand is a demand postponed because of a problem in the supply environment, such as a lack of capacity in accommodations or maybe terrorists activity. • Again this implies that when the supply conditions are more favorable, those in the deferred demand category will convert to effective demand at some future date. • Finally, there will always be those who simply do not wish to travel, constituting a category of no demand
Concepts of tourism demand • We can also consider other ways in which demand for tourism may be viewed. • For example, substitution of demand refers to the case when demand for one activity (a self-catering holiday) is substituted by another (staying ata serviced accommodation). • A similar concept is redirection of demand where the geographical location of demand is changed – a trip to Spain is redirected to Greece because of over-booking of accommodation.
Concepts of tourism demand • Finally the opening of new tourism supply- say a resort attraction or accommodation- will: • redirectdemandfrom similar facilities in the area; • substitutedemandfrom other facilities; andgenerate new demand.
Concepts of tourism demand • Economists refer to the first two of these as the displacement effect – in other words, demand from other facilities is displaced to the new one and no extra demand is generated. • This can be a problem in tourism and is an important consideration when appraising the worth of new tourism projects.
The Nature of Tourism Demand • Aggregate Demand: the quantities of a product that buyers collectively are willing and able to buy at any potential price over some specified period of time. Specifically a definition of effective demand. • A behavioral approach to demand analysis is important in tourism industry since the products are complex and the needs and levels of product knowledge of intending tourists are many and varied.
Travel and Tourism Products Different views on tourism industry products: • As a total package or set of complementaryproducts which buyer views as a single purchase, considered for example as the “dream experience” – reflects tourist purchasing behavior in the repurchase stage • As an individual product, which are complements, certainly but are considered separately by tourists in making their purchase decisions – reflects routinized buying of, for example car rental services and meals by a business person in the course of a trip.
TOURISM DEMANDBuyer Objectives(20 03 2013) • The overall objective of a tourist (or by implication market segment) may be expressed as a functional relationship Maximize Ui = Ui ( zJ ) U: utility z: a vector (j=1 to m) quantities of characteristics, of a tourist trip, desirable to the buyer
Levels of Choice in Tourism Demand In considering the demand for a simple good, individual consumers have to make two decisions: • Whether or not to purchase that generic type of good • Which particular good to choose from the range of substitutes available In tourism, there are several levels of choice: (a) the overall type of tourism required (b) destination (c) travel mode (d) accommodation and attraction visiting (e) purchasing method or distribution channel.
TOURISM DEMAND5. Levels of Choice in Tourism Demand • A.Type of tourism required: • For many cases, there is no-choice situation. i.e.,a business sales trip, pilgrimage, sports event attendance or invitation to a family wedding. The degree of obligation fixes the decision. • In other cases, there maybe choices such as a beach or touring vacation, winter cruise, taking a post convention tour.
TOURISM DEMAND5. Levels of Choice in Tourism Demand • B. Destination: • A destination maybe a single location, a set of locations as part of tour, or even a “moving” destination such as a cruise. • Individual demand depends on the group B and C variables and the consumption technology of the destination • Relative prices is the most significant variable in international destination choice
TOURISM DEMAND5. Levels of Choice in Tourism Demand • B. Destination (contd.): • The degree of substitution between destinations will depend on the similarity of the characteristic set • Choice is frequently restricted by imperfections in consumer knowledge about, and perceptions in destinations.
TOURISM DEMAND5. Levels of Choice in Tourism Demand • C. Travel Mode: • Frequently, type of trip and destination dictate a particular travel mode • There maybe desired levels of speed, convenience, comfort, safety and so on • The principal constraints could be price and the length of time available
TOURISM DEMAND5. Levels of Choice in Tourism Demand • C. Travel Mode (contd.): • For some market segments travel itself may have a high positive utility and for others all time and money spent on travel is a cost • The travel mode may include more than one type of carriage
TOURISM DEMAND5. Levels of Choice in Tourism Demand • D. Accommodation and attractions: • the choice may become fixed in the light of other tourism decisions. • the lodging product includes a large bundle of intangible and service characteristics • accommodation costs are likely to be the largest element of total destination (group B variable) costs • relative price of lodging can often influence destination perceptions and destination demand.
TOURISM DEMAND5. Levels of Choice in Tourism Demand • D. Accommodation and attractions (cont.) • an intrinsic(essential)part of the tourist trip; demand is price-sensitive • a motivation in its own right; i.e., non-tradable public products, free resource-based attractions. Price: user-pays • İt is an optional discretionary extra; Demand is influenced by either the absolute (in-destination) price or the price of the product relative to that in generating areas.
TOURISM DEMAND5. Levels of Choice in Tourism Demand E. Purchasing method: what type of retail outlet to use: the choices are • Whether to buy an inclusive package (IT) or separate services • Whether to buy direct from suppliers, such as airlines or hotels or use an agent • Which tour wholesaler or operator, or agent to use.
TOURISM DEMAND6. Constraints on Tourism Demand • Money; disposable income, business cash flow or stock of liquid assets such as savings • Political controls; passport and visa systems, price and fare regulation and travel and tourism taxes • Time; work and public holiday allowance, school and college vacation periods, time limitson conducting business trips
TOURISM DEMAND6. Constraints on Tourism Demand • Constraints such as time and money can be represented for individual tourists: Y >= pkxk V >= tkxk Y:disposable income allocated to tourism V:free time similarly allocate pk: is a column vector of prices of x elements tk: is a column vector of the time involvement necessary for each of those elements The model could be expanded to allow for non-economic constraints such as restricted personal mobility or simple lack of travel opportunity.
Indicators of tourism demand Travel propensity • One of the most useful indicators of effective demand in any particular population is travel propensity (inclination). • This measure simply considers the penetration of tourism trips in a population. • There are two forms of travel propensity:
Travel propensity • Net travel propensityrefers to the percentage of the population that takes at least one tourism trip in a given period of time. • In other words it is a measure of the penetration of travel among individuals in the population.
Travel propensity • Gross Travel Propensitygives the total number of tourism trips taken as a percentage of the population. • This is a measure of the penetration of trips not individual travelers.
Travel propensity • Clearly then as second and third holidays increase in importance, so gross travel propensity becomes more relevant. • Gross travel propensity can exceed 100% and often approaches 200% in some Western European countries where those participating in tourism may take more than one trip away from home per annum
Income and price effects on tourism demand • Analysis of tourism demand is hindered by the fact that in practice we normally only seethe equilibrium of supply and demand in tourism markets and that change represents a shift from one equilibrium position to another. • Thus we are properly examining tourism consumption rather than tourism demand. • Nevertheless, sufficient market research and comparative studies exist to build reasonably accurate analyses of the effects on tourism demand of independent variables.
Effectsof Income • The income or stock of monetary assets available to the tourism buyer is a ‘group A’ variable-it relates to all potential buyers of a generating area regardless of their preferred tourism destination. • A great deal of research measuring the effect of income changes on total tourism demand from a generator has been carried out. • The strength of the effect that income change has on demand can be measured by income-elasticity of demand, defined as the following ratio:
Effectsof Income % change in tourism demand Ex = % change in disposable income between two time periods or two groups of buyers. • It is normal to expect income-elasticity of demand to be positive for most goods and services; the demand for basic goods and services should be income-inelastic (Ey<1), whilst that for the discretionary or luxury items would be elastic -(Ey>1).
Effectsof Income • Many empirical studies have been done on income-elasticity of demand for tourism. • In general demand has been found to be relatively income-elastic, if demand is measured by tourism expenditure, but less elastic if the measure is total tourist nights or numbers.
Effectsof Income • The following figure demonstrates the effect on tourism demand of different income elasticities. If income in a generator rises from Yo to Y1 expenditure on tourism changes fromQoto each of the different levels Q1 to Q5. • The example of a tourism destination whose income elasticity of demand is negative argues that within some markets certain tourism products may be regarded as inferiorproducts.
Effectsof Income • This is difficult to prove empirically without research to isolate changes in demand for a destination from one particular generator or a particular market segment and to monitor those changes with respect to that segment’s income. • Overall tourism demand at that destination may meanwhile be increasing, as other market segments expand.
Figure : Income Elasticity of demand for different type of tourism Business IncomeMeeting VFR Holiday Secondary Vacations Y1 Y0 0 Q0 Q1 Q2 Q3 Q4Q5 Quantity Demanded
Effects of Price The effects of price changes are far more complex in tourism than are effects of changes in income. Two particular price conditions are of note: • Although the product element of a tourism package are complementary in terms of characteristics offered, they may well be substitutes in terms of price effects if they are competing for the same slice of tourist spending.
Effects of Price • Relative prices are important between destinations and generating areas, not just prices at destinations. • In other words, consumer is not simply faced with the set of prices in one geographical market but with the relative prices.
Effects of Price • In international tourism exchange rate variations are usually the major contributor to relative price differences. • Over recent years, for example, exchange rate variations have made Switzerland and Japanexpensive destinations, but most of medditeranean countries are cheap. • However, relatively high inflation may have wiped out these price advantages.
Effects of Price • As with income changes, the effects of price changes on demand can be measured with elasticities- in this case price - elasticity of demand through the formula: % change in quantity of tourism product demanded EP = % change in tourism product price
Effects of Price • The standard Law of Demand in economics holds that for most products EP will be negative- that is there is an inverse relationship between a product’s price and the demand for that product. • An EP figure numerically greater than –1 indicates elastic demand and an EP figure numerically less than –1 indicates price in elasticity or relatively unresponsive demand. • Price elasticities are also unlikely to remain constant for any one product, varying between short term and long term and according to the size of price changes.
Price Effects • The demand for tourism products runs the whole range of possible price elasticities. • In general the greater the degree of competition hence substitutability, amongst products, the higher the price-elasticity of demand is likely to be as price-conscious tourist search for cheaper alternatives. • Once again price elasticities have been found to be higher for recreational tourism than for business or VFR tourism, reflecting the discretionary nature of the one against the obligations of the other.
Effects of Price • The choice of competitive destinations for vacation tourism appears especially responsive to price change. • Long term (i.e. 6 years) price elasticity of demand for important destinations from major generating countries has been shown to vary from around – 4 for a small cost change (2.5 %) to around –1.5 for a large cost change (40%). • The resulting ‘demand schedule’ for average destination country x is portrayed in the following figure:
Estimated demand responses to holiday price changes to destinations Price A P1 B P0 C P2 D 0 Q2 Q1 Q0 Demand
Effects of Price Two cautions are necessary in interpreting this data. • Firstly, tourism demand is here expressed in relative rather than absolute amounts, which may alter values from those found by a ‘normal’ elasticity measure. • Secondlyaggregate data may hide the fact that for an individual consumer a small price change may trigger no change at all demand, if that change is considered insignificant or below the perceptual price-change threshold of the consumer.
Effects of Price • An aggregate analysis also hides the extent to which the prices of individual elements of the tourism product influence overall demand; the cost of carriage is one major variable and that the overall cost of destination items, especially accommodation, is another, but the cost and value to a consumer of particular elements of tourism experience is not always well identified.
Effects of Price • For specific individual products within tourism the picture is clearer. Demand for budget accommodation and competitive passenger carriage services, for example, has been found to be highly price-elastic. If cross-price elastic is defined as: % change in demand for product A Ecp = % change in price of product B • then where A and B are close substitutes we might expect Ecp to be positive and maybe >1. This is frequently found in, for example:
Effects of Price • Budget motel or hotel choice in major destinations • Selection of operator for local day excursion • Souvenir purchasing and duty-free shopping • Choice of busline or airline where these compete over the same routes.
Effects of Price • In these cases the products may be viewed as nearly or completely identical, and Ecpvalues are high. • Some tourists find utility from ‘shopping around’ for best buys as part of their tourism experience, or haggling in bazaars for a souvenir purchase- perhaps the closest a tourist can get to the overt display of an equilibrium market.
Effects of Price • There may be in tourism cases of products exhibiting the Veblen effect. • This is an abnormal price elasticity of demand where the Epvalue may be positive over a certain range of prices for a product. • That is demand may actually increase at a higher price.