KEY FEATURES OF TOURİSM SUPPLY The analysis of the tourism structure of tourism supply and the degree and type of competition between firms, identified a number of criteria which indicate the competitive structure of markets; for example, the number and size of firms and level of entry/exit barriers indicate the degree to which oligopoly or monopoly powers may be exercised by tourism firms. These criteria can be examined in the context of specisific tourism sectors in different countries, providing insights into the types of market structure which prevail and the nature of inter-firm competition. Key criteria which were identified within both the theoretical models and the overviews of tourism sector are;

Number and size of firms Degree of market concentration and level of entry/exit barriers Economies and diseconomies of scale and economies of scope Capital indivisibilities, fixed capacity and associated fixed costs of operations Price discrimination and product differentiation Pricing policies-leadership, wars and market-share strategies

The first four indicate market structure, while the last two also relate to the strategies which firms pursue within imperfectly competitive markets.

Number and size of firms

Where many small firms exist, the inference is that the market is competitive. A small number of firms, in contrast, indicate an oligopolistic structure, with monopoly being the limiting case of dominance by a single firm. Evidence on the numbers and sizes of firms in the transport and intermediary sectors is relatively easily ascertained where there are requirements regarding registration and regulation and trade association exist. The size of firms can be measured by a number of variables, ranging from number of employees, sales revenue, number of units sales to capital employed. In the accommodation sector, the number of rooms offered by each establishment or the total number of bed nights achieved is useful measures. The composition of tourism sectors within and between countries differs in terms of the number and size of the firms. In some countries, a domestic monopoly exists in the airline sector, as in the case of Aloha Airlines in Hawaiian island. In others, an oligopolistic structure prevails; for example, in Austrasia, the air transport sector has been dominated by two to three airlines operating reciprocal agreements. Within the accommodation sector, the large number of establishments selling differentiated products is suggestive of monopolistic competition, while some bus and coach sectors have been highly competitive. It is possible to conceive of a spectrum of competition with strongly competitive conditions coexisting with oligopoly in some tourism markets, with a degree of interaction between them.

Degree of market concentration and level of entry/exit barriers

The degree of concentration is a further indicator of the competitiveness of markets. High concentration is suggestive of oligopoly or monopoly while a low incidence implies a high level of competition. Measures of concentration can be broadly divided into those which focus on the number and size of firms and those which consider the implications of variations in size.

The Lorenz curve can be used to rank, in cumulative form, the smallest to largest firms as a percentage of the total number of firms trading in the market. The Gini coefficient represents the magnitude of the divergence from exact quality in size of firms, so that a value of zero denotes that all firms are of all equal size and, ostensibly, highly competitive conditions prevail, whereas a value of unity equates to pure monopoly. The concentration ratio ranks firms from largest to smallest, so that a high percentage score indicates a market in which monopoly prevails, while a low score suggests that many firms serve the market. The degree of market concentration in different tourism sectors varies between sectors, countries and/or regions and key tourist locations of a given country. In Spain, the five main charter airlines were responsible for over 80 percent of all passenger kilometers flown by Spanish charter airlines at the end of the 1980s while in UK, the top five firms carried approximately 70 percent of all charter passengers. The extent to which a higher degree of market concentration is accompanied by profits in excess of the break-even level is determined, in part, by ease of entry into and exit from the sector and level of sunk costs involved in operating the firm. Traditionally, attention has concentrated on innocent entry and exit barriers determined primarily by technological requirements, principally the scale at which firms can operate efficiently.

Economies and diseconomies of scale and economies of scope

In order to relate economies and diseconomies of scale to models of market structure, it is necessary to look again at economic theory. The essence of economies scale is that supply costs per unit of production decline as inputs are increased and output expands. Clearly, as long as average unit costs are falling, there is an incentive for a firm to go on enlarging. The point where unit costs start to rise again is where diseconomies set in and the firm would no longer expand. In economic theory the issue is whether diseconomies are reached a relatively small or large size of firm. The former implies many small firms operating in a highly competitive market, trading at prices which equate lowest average cost, while the latter suggests the converse. In conjunction with the number of firms, their size and level of barriers to entry, evidence of extend of economies and diseconomies of scale can indicate market structure. Economies of scope occur where additional products share common inputs. For example, in advertising and marketing new products, suppliers can draw on existing resources. Therefore, opportunities for economies of scope are possible where there are capital indivisibilities or spare capacity. Evidence of unexploited economies of scale or scope, or potential for them to occur in the future through technical change, would indicate the likelihood of increased firm size and greater market power, so rendering the market less competitive. Conversely, diseconomies of scale, or supply where widely differing input proportions are possible, would enhance the long term viability of smallest firms and create a structure which is more competitive. The discussion of tourism supply sectors indicated that although large firms can incur economies of scale and dominates some markets; this does not preclude many small firms from being successful in the same market. In general, the principal transport sectors are characterized by the possibilities of economies of scope. It is in the accommodation and intermediary sectors where greater polarization has occurred.

Capital indivisibilities, fixed capacity and associated fixed costs of operations

Many tourism sectors utilize capital equipment which is indivisible, aircraft being obvious examples. The firm often possesses a set amount of equipment and thus fixed capacity over the short run and incurs fixed costs in maintaining it; it can be altered only in long run when re-capitalization occurs. As capital is used, variable costs arise, for example, in the form of fuel and staff costs in the case of air transport. In the short run, economics argues that a firm, even if does not cover its total costs, should continue to trade as long as it covers its variable costs. However, in the long run the firm must generate sufficient revenue to cover both its fixed and variable costs if it is to remain in business. It is useful to analyze the structure of costs to ascertain both the absolute level of costs and proportion which is fixed, as opposed to variable. In the accommodation sector, the fixed costs as a proportion of total costs are much lower than in the transport field and the value of fixed costs associated with small accommodation establishments are often low. Overall, with items such as insurance and other capitals included, fixed costs are between half and three-fifths of total costs. In the intermediary sector conditions are rather different, depending upon whether tour operators and travel agents operate their own aircraft and accommodation. Evidence of high fixed costs coupled with capacity in some sector is indicative of the emergence of large firms which can exploit economies of scale, increasing the degree of concentration. Operations subject to high fixed capacity and fixed costs are required relatively high occupancy rates or load factors in order to meet both fixed and variable costs; the distinction between profits and losses occurs at occupancy rates around such break-even points. Cyclical and seasonal variations in tourism demand exacerbate profits volatility, especially where aggregate fixed capacity is feature of independent decisions made by many suppliers such as in the accommodation sector. Strategies in the short run are aimed primarily at covering fixed costs, involving attempts to capture the trade from the rivals. In the long run, consideration is given to means of raising the demand in order to increase load factors or occupancy rates, particularly in off-peak periods.

Price discrimination and product differentiation

The pricing and output policies practiced by tourism firms provide some indication of market structure. A large number of firms, which are producing relatively homogenous products which must be sold at prevailing price in highly competitive markets, approximate to the model of perfect competition. Taxi services in many tourists destinations are a case in point. In imperfectly competitive situations where firms have a degree of control over the market, pricing and output strategies can be implemented. There is considerable interdependence in the pricing and output policies of oligopolies as they have to take account of their rivals’ actions when determining their own strategies. Price discrimination is based on the idea that many consumers, who purchase goods and services in markets where a single price prevails, enjoy a welfare gain known as consumers’ surplus because they would have been willing to buy higher prices, sometimes referred to as their reservation price. Suppliers who recognize this can discriminate between purchasers and charge higher prices to those with higher reservation prices. The mostly likely situation in which the price discrimination can be employed is where different consumers have distinct price elasticizes of demand, permitting the supplier to charge higher prices to those whose demand is inelastic while others, whose demand is more elastic, are charged lower prices.

There are number of examples of discriminatory pricing in tourism. It is possible to observe price discrimination in air, ferry and train travel and in the accommodation sector. For example, airlines perceive their passengers as falling into three groups- first class, club and economy- in which first and club class seats are filled mostly by business travelers. In the accommodation sector, the larger hotels which have spare capacity offer weekend bargain breaks, charging guests with inelastic demand higher prices during the working week. Market segmentation and product differentiation are also common practices under imperfect competition. Product differentiation can take the form of vertical differentiation between different quality products so that, for example, some tour operators attempt to specialize in providing luxury holidays in expensive locations. It may also involve horizontal differentiation via the supply of a range of products types, such as the provision of holidays for mass market demand as well as for the upper segment of the market, young people, elderly consumer awareness of and demand for particular product types and advertising performs a similar function. Few smaller firms have either the capacity or the market power to exercise significant control over prices so that serving a specific segment or differentiating there product is the only option open to them. Their concern is often to create rather than extend market. Effectively they look for an unfilled niche and attempt to meet a specific demand in what may be a relatively small market segment. To this extent the product is automatically differentiated.

Pricing policies-leadership, wars and market-share strategies

Pricing strategies are central to oligopoly and may be used in attempts to maintain or increase market share and/or to eliminate excess capacity. As economics of oligopoly predicts, price cutting by one airline provokes a response from others. This occurred in the case of Trans World Airline when it cut fares within the US in 1991. The matching of these fare cuts by rivals with a lower operating cost base partially explains the airline’s bankruptcy. In the accommodation sector, price wars have been less evident because there is greater separation of establishments in the markets in terms of type, quality and location. Where establishments are clustered, such as the larger hotels in holiday resorts, near airports or in city centers, there may be implicit price fixing because operators have easy access to information on competitors’ charges and can set their own prices accordingly. The almost classic demonstration of the oligopoly case in tourism supply is package market tour operations. Here price leadership and wars and attempts to increase market share by the larger players are strategies which have been adopted since the advent of mass tourism. The mass package market is dominated by the top tier of approximately ten tour operators, who have increasingly diversified into specialized types of holidays to exploit economies of scope. At the other end of the firm size spectrum are small specialist operators which can survive through niche marketing, although there has been a high birth and death rate of companies. Price leadership and pursuit of increased market share is mainly undertaken by large groups through long term strategies such as mergers or takeovers. Increased integration between firms appears to be a logical outcome of tourism markets where there is a long chain of supply. Reciprocal agreements, franchising and leasing constitute forms of integration other than ownership ties. The relevance of integration to competitive structure is that its existence suggests information advantages, cost savings and higher profits effected by enlargement of the firm and possibilities of increased market power, associated with oligopoly and even duopoly and monopoly.

Conclusions

The outlines of the structure of the accommodation, intermediary and transport sectors and the discussions of their key features reveal that market structures can be quite heterogeneous within each sector. They possess such characteristics as a wide range of competitive forms, market segmentation, product differentiation, high rates of entry and exit, some scale economics and significant variations in the degree of regulation. Moreover, there appear to be considerable changes in the structure of tourism supply in terms of the number of the firms, their size and market share, particularly in the intermediary sector.